Effective Strategies for Managing the Outsourcing of Information Technology

Walden University

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Eective Strategies for Managing the Outsourcing

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Marsha N. Hopwood

Walden University

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Walden University

College of Management and Technology

This is to certify that the doctoral study by

Marsha Hopwood

has been found to be complete and satisfactory in all respects,

and that any and all revisions required by

the review committee have been made.

Review Committee

Dr. Tim Truitt, Committee Chairperson, Doctor of Business Administration Faculty

Dr. Gergana Velkova, Committee Member, Doctor of Business Administration Faculty

Dr. Annie Brown, University Reviewer, Doctor of Business Administration Faculty

Chief Academic Officer

Eric Riedel, Ph.D.

Walden University

2018

Abstract

Effective Strategies for Managing the Outsourcing of Information Technology

Marsha Hopwood

MBA, University of Minnesota, 2004

BS, Florida Agricultural and Mechanical University, 1995

Doctoral Study Submitted in Partial Fulfillment

of the Requirements for the Degree of

Doctor of Business Administration

Walden University

July, 2018

Abstract

More than half of information technology (IT) outsourced projects fail, primarily due to a

lack of effective management practices surrounding the outsourcing end-to-end process.

Ineffective management of the IT outsourcing (ITO) process affects organizations in the

form of higher than expected project costs, including greater vendor switching or

reintegration costs, poor quality, and loss of profits. These effects indicate that some

business leaders lack the strategies to effectively manage the ITO process. The purpose of

this single-case study was to apply the transaction cost economics (TCE) theory to

explore strategies 5 business professionals use to manage an ITO project in a financial

services organization located in the Midwestern region of the United States. Participant

selection was purposeful and was based on the integral role the participants play on the

ITO project. Data collection occurred via face-to-face semistructured interviews with the

participants and the review of company documents. Data were analyzed using inductive

coding of phrases, word frequency searches, and theme interpretation. Three themes

emerged: vendor governance and oversight, collaborative strategic partnership, and risk

management strategies enabled effective management of ITO. Identifying and executing

appropriate outsourcing strategies may contribute to social change by improving

outsourcing infrastructure, which might support job creation; increasing standards of

living, especially within emerging markets; and heightening awareness of different

cultures, norms, and languages among people living in different regions around the world

to establish commonalities and gain alignment with business practices.

Effective Strategies for Managing the Outsourcing of Information Technology

Marsha Hopwood

MBA, University of Minnesota, 2004

BS, Florida Agricultural and Mechanical University, 1995

Doctoral Study Submitted in Partial Fulfillment

of the Requirements for the Degree of

Doctor of Business Administration

Walden University

July, 2018

Dedication

I can do all things through Christ who strengthens me.

-Philippians 4:13

First and foremost, I dedicate this study to my Lord Jesus Christ, who I give all

the glory, honor, and praise for strengthening me over the course of completing this

degree and research study. God’s grace and mercy renewed my spirit daily to continue to

persevere to the finish line. Second, I would like to thank my mother, Laura, for the

tremendous support she provided while I spent countless hours studying. Mom, you have

always encouraged me to pursue my goals, dreams, and aspirations, and I will be

eternally grateful for all the help you provided me over the years. Third, my true

inspiration for not giving up was the love and joy of my life, my son T.J. Thank you for

being caring, understanding, and supportive of me while I completed this degree. I hope

that I have provided an example of the persistence and dedication needed to accomplish

your goals. I also thank my brother, Damion, for always offering a lending hand in order

to lighten the load while I completed the program. Additionally, I thank my dog, Gizmo,

for always comforting me by cuddling next to me during my study time. Your presence

soothed my soul and encouraged me to continue to press forward. Last, I thank all my

friends and family (too many to mention individually) around the globe who provided

words of encouragement and inspiration to never quit. Thank you all for your motivating

support of me during this journey.

Acknowledgments

I want to thank my committee members for their respective efforts to guide me

through this process. To my chair, Dr. Tim Truitt, for providing me timely feedback,

general guidance, and resources needed to complete my study. To my second committee

member, Dr. Gergana Velkova, for paying close attention to detail and providing specific

feedback that helped me significantly improve my study. To the University Research

Reviewer, Dr. Annie Brown, for her behind-the-scenes efforts in ensuring my research

study complied with the requirements of the university and the research community as a

whole. Without these individuals, and various other professors, editors, and scholars, this

journey would have been far more difficult and far less rewarding. The learning

experience has been profound and has opened my mind to the endless possibilities ahead

of me.

Table of Contents

List of Tables ..................................................................................................................... iv

Section 1: Foundation of the Study ......................................................................................1

Background of the Problem ...........................................................................................2

Problem Statement .........................................................................................................3

Purpose Statement ..........................................................................................................3

Nature of the Study ........................................................................................................4

Research Question .........................................................................................................5

Interview Questions .......................................................................................................5

Conceptual Framework ..................................................................................................6

Operational Definitions ..................................................................................................7

Assumptions, Limitations, and Delimitations ................................................................9

Assumptions ............................................................................................................ 9

Limitations .............................................................................................................. 9

Delimitations ........................................................................................................... 9

Significance of the Study .............................................................................................10

Contribution to Business Practice ......................................................................... 10

Implications for Social Change ............................................................................. 11

A Review of the Professional and Academic Literature ..............................................11

Criteria for Literature Search and Selection ......................................................... 12

Transaction Cost Economics Theory .................................................................... 13

Types of Outsourcing ............................................................................................ 34

Outsourcing Process.............................................................................................. 44

Advantages and Challenges of Outsourcing ......................................................... 48

Business Strategies for Managing the Outsourcing Process ................................. 65

Transition and Summary ..............................................................................................80

Section 2: The Project ........................................................................................................82

Purpose Statement ........................................................................................................82

Role of the Researcher .................................................................................................83

Participants ...................................................................................................................86

Research Method and Design ......................................................................................89

Research Method .................................................................................................. 89

Research Design.................................................................................................... 90

Population and Sampling .............................................................................................93

Ethical Research...........................................................................................................95

Data Collection Instruments ........................................................................................96

Data Collection Technique ..........................................................................................98

Data Organization Techniques ...................................................................................101

Data Analysis .............................................................................................................101

Reliability and Validity ..............................................................................................104

Reliability ............................................................................................................ 104

Validity ............................................................................................................... 105

Transition and Summary ............................................................................................107

Section 3: Application of Professional Practice and Implications for Change ................109

Introduction ................................................................................................................109

Presentation of the Findings.......................................................................................110

Theme 1: Vendor Governance and Oversight Assisted Effective

Management of ITO ................................................................................ 111

Theme 2: Collaborative Strategic Approach Facilitated Effective

Management of ITO ................................................................................ 134

Theme 3: Sound Risk Management Strategies Enabled Effective

Management of ITO ................................................................................ 141

Applications to Professional Practice ........................................................................148

Implications for Social Change ..................................................................................150

Recommendations for Action ....................................................................................151

Recommendations for Further Research ....................................................................153

Reflections .................................................................................................................154

Conclusions ................................................................................................................155

References ........................................................................................................................157

Appendix A: Invitation Letter ..........................................................................................192

Appendix B: Interview Guide ..........................................................................................194

Appendix C: Interview Questions ....................................................................................195

iii

List of Tables

Table 1. Strategic Partner Performance Review Results for 2017 ...................................131

Table 2. Supplier Health KPI Results as of December 31, 2017 .....................................140

Section 1: Foundation of the Study

Researchers have acknowledged profitability as a key indicator of business

performance (Agrawal & Haleem, 2013). Due to the complexity and uncertainty

surrounding business decisions related to outsourcing, however, corporate leaders have

struggled with estimating total outsourcing costs to determine profitability (Handley &

Benton, 2013; Larsen, Manning, & Pedersen, 2013). Patil and Wongsurawat (2015)

stated that ITO might be more complicated compared to other types of outsourcing due to

the technical skills required to execute complex infrastructure activities. Given the

compound nature of outsourcing transactions, Schwarz (2014) posited defining and

estimating the success of outsourced IT processes are challenging tasks.

Successful outsourcing requires a holistic and comprehensive strategy toward

managing outsourced operations, which includes contract management, vendor

governance, and risk management (Wiengarten, Pagell, & Fynes, 2013). Letica (2014)

found a statistically significant, positive correlation between robust contract management

and successful outsourcing. Business leaders who outsource may reap benefits, such as

reduce costs; improve productivity; and gain new capabilities, innovation, and flexibility

(Marchewka & Oruganti, 2013). Wiengarten et al. (2013) argued that business leaders

commonly applied both cost and quality performance metrics to measure outsourcing

success. Moreover, Wiengarten et al. added the cost metrics were easier to measure

because quality parameters were highly subjective in nature. Hence, enhancing business

leaders’ understanding of effective strategies for outsourcing IT offshore and onshore

might improve the success rate of ITO.

Background of the Problem

Business leaders execute many outsourcing initiatives that are below expected

economic and performance levels (Huber, Fischer, Kirsch, & Dibbern, 2014; MacKerron,

Kumar, Benedikt, & Kumar, 2015). Handley and Benton (2013) noted that leaders facing

poor communication with their service providers, complexity of business processes,

inadequate contract management, and insufficient vendor oversight generated lower than

projected outsourcing performances. Business leaders who participate in offshore

outsourcing face additional challenges, including language barriers, cultural differences,

corruption, and harsh government and foreign policies (Denning, 2013b; Osadchyy &

Webber, 2016). This is an issue because more than 50% of Fortune 500 company

business leaders are outsourcing IT offshore to India (Javalgi, Joseph, Granot, & Gross,

2013). Therefore, leaders must be properly trained to identify and implement appropriate

strategies to successfully manage offshore ITO processes.

With an understanding of effective strategies for ITO, business leaders might be

able to achieve better outcomes. Patil and Wongsurawat (2015) found that business

leaders who implemented appropriate outsourcing strategies mitigated the opportunistic

behaviors of vendors, reduced cost, and improved performance. Conversely, Hodosi and

Rusu (2013) reported an imbalance in the related literature on successful strategies from

the perspectives of service providers and their outsourcing clients. Consequently, I

addressed this gap in the literature by eliciting clients' perspectives on effective strategies

for managing ITO.

Problem Statement

Over 55% of IT outsourced project leaders fail primarily due to higher than

expected project costs, thereby leading to unfavorable financial results, including greater

vendor switching or reintegration costs (Gorla & Somers, 2014). Despite the high failure

rate of ITO projects (Schwarz, 2014), business leaders have continued to increase their

ITO investments, which reached $288 billion in 2013 globally, with a forecasted

compounded annual growth rate of 5.4% until 2017 (Lioliou & Zimmermann, 2015). The

general business problem is that business leaders are experiencing increased project costs

because of ineffective outsourcing management practices and, subsequently, low project

success rates of less than 45% for executed ITO projects. The specific business problem

is that some business leaders lack strategies to manage ITO.

Purpose Statement

The purpose of this qualitative single-case study was to explore strategies that

business leaders use to manage ITO. The population included five business professionals

in a financial services organization located in the Midwestern region of the United States

who used strategies to manage ITO. Implications for positive social change include the

potential to (a) improve outsourcing infrastructure, which might support job creation; (b)

increase standards of living, especially within emerging markets; and (c) heighten

awareness of different cultures, norms, and languages among people living in different

regions around the world to establish commonalities and gain alignment with business

practices.

Nature of the Study

I chose a qualitative methodology for this study. The three research methods

include (a) qualitative, (b) quantitative, and (c) mixed methods (Bernard, 2013).

Qualitative researchers explore ideas, opinions, and complex phenomena through use of

techniques, such as physical observation, interviews, and document review (Merriam &

Tisdell, 2015). Quantitative research is suitable for conducting statistical data analysis,

measuring variables to test hypotheses, and evaluating relationships and correlations with

numerical data (Bernard, 2013). A mixed-method researcher incorporates both qualitative

and quantitative aspects (Starr, 2014). Quantitative and mixed-methods approaches were

not appropriate for this study because the purpose was not to conduct statistical analysis,

evaluate relationships, or draw correlations. I chose a qualitative research approach

because I sought to evaluate a complex business phenomenon primarily through

interviews and document review.

I chose a case-study design for my research. Merriam and Tisdell (2015) stated

that the four qualitative research designs include (a) case study, (b) phenomenology, (c)

ethnography, and (d) narrative. A case-study research design is an empirical inquiry a

researcher conducts to bring clarity to complex issues, ideas, and objects by using a

minimum of two qualitative data collection techniques, such as physical observation,

interviews, and document review (Yin, 2013). Yin (2013) noted that multiple data

collection methods provide a holistic understanding of real-world, complex business

phenomena. Researchers use a phenomenological design to gain an understanding of

individuals’ lived experiences, primarily through in-depth interviews (Tomkins &

Eatough, 2013). I rejected the phenomenological design for this research because the

purpose of the study was not to gain a deeper understanding of the participants’ lived

experiences. Investigators use the ethnography research design to analyze societal and

cultural aspects of research phenomena (Goldstein, Gray, Salisbury, & Snell, 2014). I

opted not to use the ethnography design because the purpose of the study was not to

analyze societal and cultural elements of the phenomenon. Researchers use a narrative

research design to focus on storytelling based on a description, historical account, or

sequence of events (Stephens & Breheny, 2013). I did not use the narrative research

design because the purpose of the study was not to focus on storytelling or to review a

sequence of events. I chose the case-study design to gain a comprehensive and holistic

understanding of the effective strategies business professionals use to manage ITO.

Research Question

The overarching research question for the study was, What strategies do business

leaders use to manage outsourced IT processes?

Interview Questions

I asked the following series of open-ended interview questions to address the

stated research question:

1. How did you identify which IT processes to outsource and which processes to

maintain in-house?

2. What were the specific metrics (e.g., cost and quality performance metrics)

used to determine a favorable result for the outsourced IT project?

3. How do you align outsourcing initiatives with the overall business strategy

and priorities of the company?

4. What strategies did you use to select a suitable vendor for the outsourced IT

project?

5. What vendor management strategies did you employ to manage the

outsourced IT project effectively?

6. What techniques or strategies do you implement to oversee and govern the

major outsourcing activities to ensure successful outcomes?

7. How do you identify and mitigate key risks and challenges throughout the

outsourcing engagement?

8. How do you hold relevant employees and management accountable for the

success of outsourced IT projects?

Conceptual Framework

The TCE theory was the conceptual framework for the study. Inspired by Coase’s

(1937) contract theory and the transaction cost concept, Williamson (1979) reintroduced

and expounded the TCE theory during the 1970s. Lacity and Willcocks (2014) found that

the TCE theory was the most appropriate and widely used for evaluating ITO

transactions. By focusing on key characteristics of a transaction, practitioners and

scholars have used the theory to explain and forecast outsourcing decisions, as well as

business outcomes (Gorla & Somers, 2014).

Some researchers have used the TCE theory to provide insight into reducing

transaction costs by implementing effective strategies to mitigate outsourcing cost drivers

through a sound governance infrastructure (Vilko, 2013; Vining & Globerman, 1999).

The key propositions underlying the theory include (a) attributes of a transaction (i.e.,

asset specificity, uncertainty, frequency, and complexity) and (b) behavioral assumptions

(i.e., bounded rationality and opportunism; Brewer, Wallin, & Ashenbaum, 2014).

Cabral, Quelin, and Maia (2014) noted that researchers could use TCE theory to assist

business leaders in identifying the appropriate governance structures to manage

outsourcing while Vining and Globerman (1999) observed that the theory was helpful to

researchers in identifying appropriate decisions and strategies, given various transaction

cost determinants (i.e., complexity and uncertainty).

Mackenzie and DeCusatis (2013), proponents of the TCE theory, asserted that

leaders who used appropriate outsourcing strategies generated positive outcomes. In

contrast, corporate outsourcing initiatives can create significant losses and raise quality

concerns if not executed properly (Marchewka & Oruganti, 2013). TCE theory was

applicable for the study because it provided a lens through which I was able to explore

the different characteristics of a transaction that influenced the decisions and strategies

used to mitigate the numerous outsourcing risks that affected business outcomes.

Operational Definitions

Backsourcing: Backsourcing is the opposite of outsourcing and is the process of

reintegrating production or processes in-house that a third-party vendor previously

performed (Cabral et al., 2014).

Business process outsourcing (BPO): BPO refers to when management transfers

an entire process or a segment of an internal process to a third-party service provider

(Brcar & Bukovec, 2013; Pratap, 2014).

Contract manufacturing (CM): CM is a type of outsourcing where another

manufacturer, acting on behalf of the original equipment manufacturer (OEM), produces

a product or a component of a product (Brewer, Ashenbaum, & Carter, 2013a).

Information technology outsourcing (ITO): ITO refers to the transfer of IT tasks,

including operations, infrastructure, application development, and maintenance, to an

external IT service provider to improve performance and/or reduce cost (Shemi, Mgaya,

& Nkwe, 2015).

Offshore outsourcing: Offshore outsourcing refers to service providers’

production of goods or services at equal (or higher) quality outside the home country of

the client (Javalgi et al., 2013).

Outsourcing: Outsourcing is a classic make-or-buy decision that enables a third

party to produce certain goods or services at a competitive rate, while also enabling

redeployment of internal resources to perform value-added activities (Javalgi et al.,

2013).

Reshoring: Reshoring is the opposite of offshoring and entails bringing processes

or services back in-house that vendors previously performed outside the home country of

the outsourcing client (Skiffington, Akoorie, Sinha, & Jones, 2013).

Sustainable outsourcing: Sustainable outsourcing is the ability to outsource

products or processes intended to achieve social, environmental, and economic business

objectives, also known as the positive triple bottom line (S. Li, Okoroafo, & Gammoh,

2014).

Assumptions, Limitations, and Delimitations

Assumptions

In the context of scholarly research, assumptions refer to information that is

deemed factual without validation or confirmation (Carpenter, Roger, & Kenward, 2013).

I made three assumptions for this research. The first assumption was that participating

business leaders would understand the strategies they used to manage ITO. The second

was that the research participants could accurately recall their experiences and key

learning while participating in the ITO project. The third was that all participants would

provide honest responses to the interview questions.

Limitations

Connelly (2013) defined limitations as potential weaknesses that were not in the

control of the researcher. I identified two limitations for this study. First, using a single-

case study provided a limited and skewed perspective that did not represent the targeted

population. Second, research participants could choose not to answer certain interview

questions due to confidentiality concerns, which might have affected the quality and

validity of the study.

Delimitations

Delimitations refer to the boundaries or scope of a research study (Carstens,

Pelletier, Reid, & Satler, 2013); these are within the control of the researcher. Delimiting

factors may include the research purpose, the research question, the types of variables,

the conceptual framework, and the selected population (Yin, 2013). One delimitation of

my study was that I interviewed financial services leaders who engaged in an ITO project

for a company located in the Midwestern region of the United States. For this reason, the

findings might not be transferable to other organizations or research sites. Finally, I

analyzed the findings exclusively through the lens of the TCE theory.

Significance of the Study

Contribution to Business Practice

Outsourcing is highly complex due to the numerous uncertainties surrounding the

end-to-end process including vendor selection, contract negotiations, and vendor

governance (Tseng & Chen, 2013). Identifying appropriate strategies to manage

outsourced IT processes that maximize profitability and improve performance is

challenging for many business leaders (Agrawal & Haleem, 2013). This study, thus, has

significant implications for business practices because it provides leaders, including IT

professionals, project managers, and risk management professionals, the skills necessary

to identify appropriate business strategies for managing IT outsourcing. A better

understanding of ITO might aid business leaders as they seek to make more cost-effective

decisions related to the outsourcing of IT processes.

Enabling management to proactively mitigate outsourcing risks might result in

increased profitability (Cabral et al., 2014; Letica, 2014). Academic scholars and

researchers might gain new insight and knowledge from this study’s findings to enhance

existing related theories or develop new models to facilitate the management of

outsourcing (Lacity & Willcocks, 2014; Lyons & Brennan, 2014). Researchers might also

consider replicating the case-study research in other industries and/or regions in the

United States to determine similarities and differences in managers’ use of strategies for

ITO, while further advancing the knowledge concerning this complex phenomenon.

Implications for Social Change

Patil and Wongsurawat (2015) stated that an appropriate outsourcing strategy

would eventually reduce cost and improve enterprise performance, while driving future

growth and demand for resources around the world. The results of this study might assist

business leaders in identifying effective outsourcing strategies that could significantly

reduce financial losses and improve the overall economic success rate of outsourcing.

The research results might also contribute to positive social change by (a) improving

outsourcing infrastructure that might support job creation; (b) increasing the standard of

living, especially within emerging markets; and (c) heighten awareness of different

cultures, norms, and languages among people living in different regions around the world

to establish commonalities and gain alignment with business practices.

A Review of the Professional and Academic Literature

My purpose in completing the literature review was to develop a comprehensive

understanding of the various decision-making theories, strategies, and risks regarding

managing outsourcing. Studying these three key areas is imperative for understanding the

strategies business leaders use to manage ITO. In conducting an extensive literature

review, I found multiple types of outsourcing, strategies, risks, and theories that related to

the study problem statement.

Criteria for Literature Search and Selection

To accomplish an extensive literature review, I reviewed search engines (or

databases) for articles and conference papers dated from 2013 to 2018. The databases I

searched included Science Direct, Emerald Management Journals, Sage, ABI/Inform

Complete, Business Source Complete/Premier, and Google Scholar. The keywords and

phrases used in the literature search included outsourcing, outsourcing process, ITO,

offshoring, ITO process, outsourcing strategies, outsourcing success factors, outsourcing

failures, outsourcing risks, outsourcing risk mitigation strategies, and TCE theory. Using

these terms, I found over 1,000 articles and conference papers related to the research

topic.

I examined each article and conference paper to determine if the reference was

scholarly, peer-reviewed, and relevant for my study. I carefully reviewed relevant articles

to determine the study’s purpose, research design and methodology, the theory used, and

key findings. Next, I summarized the key points from each study and assigned

classification codes to clearly identify themes in the literature.

This literature review has five major categories: TCE theory, types of

outsourcing, outsourcing process, advantages and challenges of outsourcing, and business

strategies for managing outsourcing. For the TCE theory section, I discuss the primary

propositions underlying the theory, as well as related and rival theories. Next, I discuss

the different types of outsourcing arrangements, the end-to-end outsourcing process, and

the advantages and challenges of outsourcing. Finally, I provide a comprehensive

discussion around the various business strategies for managing outsourcing.

I used the TCE theory (Williamson, 1979) as the conceptual framework for

analyzing the research problem and evaluating the findings. I aligned the literature review

to the research question and business problem of interest. In agreement with Walden

requirements, the literature review is composed of at least 85% peer-reviewed articles,

with the remaining percentage comprised of seminal books and conference papers.

Transaction Cost Economics Theory

The TCE theory is the most prevalent decision-making theory that researchers use

to assess governance, transaction attributes, and the implications for total costs arising

from outsourcing (Hamed MoosaviRad, Kara, & Ibbotson, 2014; Tseng & Chen, 2013).

Also known as transaction cost theory, the construct provides both internal and external

perspectives on transactions conducted within organizations or on the external market

through a governance hierarchy (Cabral et al., 2014). Cabral et al. (2014) proposed an

integrative framework, primarily derived from the TCE theory, including micro and

macroeconomic considerations that influence the decision to reintegrate operations that

were performed by third-party service providers. Specifically, the framework includes the

following factors: internal and external political pressures, strategic intent, contracting

issues and capabilities, and bandwagon effects (i.e., duplicating the actions of others to

conform to a standard.

Williamson (1979, 1985) argued that the TCE theory underscored certain

operational activities that were more cost-effective when performed internally based on

core competencies, whereas others were advantageous for outsourcing or offshoring to

maintain a competitive advantage. The essential aim embedded within the TCE theory is

to increase a firm’s value by outsourcing inefficient processes to third-party vendors

(MacKenzie & DeCusatis, 2013). Many scholars have used the TCE theory to evaluate

transaction attributes and cost inferences, both of which influence outsourcing decisions,

along with business outcomes (Cabral et al., 2014; MacKenzie & DeCusatis, 2013;

Williamson, 1979, 1985). Understanding the drivers of a transaction and the total cost

implications may assist management in making outsourcing business decisions, as well as

identifying strategies to manage the outsourcing process.

Nordigården, Rehme, Brege, Chicksand, and Walker (2014) stated that

transaction cost represented the allocation of resources to manage activities between

parties, such as in an outsourcing engagement. Vining and Globerman (1999), who are

proponents of the TCE theory, designed a conceptual framework to assess the

characteristics of outsourcing transactions and the total costs or transaction costs of the

outsourcing venture. The authors explained that the total cost of a transaction included

production, bargaining, and opportunism costs, whereas incremental costs (i.e., increase

in total cost driven by an increase in production or another activity) were the most

relevant in determining the make-or-buy outsourcing decision. Production costs consist

of internal manufacturing costs or the direct purchase price for a product or service.

Bargaining costs refer to expenses associated with the negotiation process, such as

monitoring and enforcing costs and the cost of disputing contract terms. Opportunism

costs are those aligned with unethical motives of any party involved in the transaction.

The main objective of the TCE theory is to minimize the total cost associated with

outsourcing or offshoring by implementing effective strategies to mitigate outsourcing

cost drivers (Vilko, 2013). Thus, transaction cost represents any cost affiliated with the

outsourcing transaction, including negotiation, production, and opportunism costs.

Business leaders should understand the total cost and the characteristics of a transaction

before making their outsourcing decisions or formulating strategies to manage

outsourcing.

Two behavioral assumptions (bounded rationality and opportunism) influence

outsourcing transaction costs (Brewer et al., 2013a). Williamson (1985) stated that

bounded rationality is based on the assumption that there are cognitive limits to the

human mind’s ability to process multidimensional information to make timely and

critical business decisions that present a level of uncertainty and complexity to the

outsourcing decision. Second, opportunism represents an individual’s experience of self-

seeking motives fueled by intentional and deliberate actions (Handley & Benton, 2013).

The combination of the two behavioral assumptions results in information asymmetry,

which influences the outsourcing business outcome (Tseng & Chen, 2013). Lioliou and

Zimmermann (2015) stated that opportunistic behaviors varied, including failing to fulfill

promises and obligations, not disclosing relevant information regarding ventures, and

reducing the quality of service. Sherwat and Hanafi (2013) added that clients and vendors

have an inherent conflict of interest in outsourcing engagements, where the client is

motivated to demand services at the lowest cost, and the vendor desires the highest profit

margin. These business partnerships could result in opportunistic behaviors among the

parties involved in the outsourcing transaction. Additionally, the human element

compounds the complexity of transactions with certain limitations, such as bounded

rationality and inherent conflicts of interest. In addition to the behavioral assumptions

that influence transaction costs, other determinants, such as complexity, contestability,

and asset specificity, also affects outsourcing transaction costs.

Vining and Globerman (1999) reported that three major determinants were

inherent in all outsourcing initiatives that affected transaction costs: (a) product/activity

complexity, which showed a direct relationship between complexity and transaction costs;

(b) contestability, which referred to the ability of a supplier or vendor to enter or exit a

particular market, and thus had supply and demand implications; and (c) asset specificity

(i.e., physical assets, location specificity, technical specificity, and human assets), which

signified the customization of an asset with limited alternative uses, thereby increasing

costs. Vining and Globerman developed a conceptual framework that leveraged the TCE

theory to assist leaders in identifying appropriate transaction strategies and decisions,

given the three determinants. For example, if the outsourcing transaction complexity and

asset specificity are low, management can rely on a highly contestable market through the

contract termination process. Similarly, if the outsourcing transaction complexity and

asset specificity are high, management should expect opportunistic vendor behaviors, and

a collaborative long-term strategic approach will be more suitable for the transaction.

Alderete (2013) supported the TCE theory when classifying individual hardware

IT components for small and medium-sized enterprises (SMEs) as complex and asset

specific. He concluded that the components were likely candidates to maintain in-house,

rather than be outsourced. Otherwise, a long-term collaborative and strategic partnership

was a suitable strategy for managing outsourcing.

Brewer et al. (2014) added that the frequency (i.e., number of times a particular

transaction is executed) of outsourcing transactions within a particular governance

structure and the uncertainty (i.e., technological, behavioral, and environmental)

surrounding the transaction were additional influences on total cost. Moreover, Schneider

and Sunyaev (2016) stated that uncertainty referred to the unpredictability and

complexity inherent in outsourcing transactions. Business leaders who assessed the

specific characteristics of these transactions were better equipped to develop effective

outsourcing strategies.

Related theories. Challengers of TCE have perceived the theory as providing a

limited or insufficient perspective on complicated outsourcing decisions. The TCE theory

assist scholars in understanding governance and transaction cost dynamics, while

outsourcing decisions, include other intricacies related to resource, contract, and

relationship management. Consequently, researchers have either combined other theories

with TCE or utilized entirely different theories to explore the multidimensional aspects of

outsourcing. The resource-based view (RBV) is one of these theories (Pratap, 2014).

Resource management theories. Barney (1991) introduced the RBV to offer an

internal perspective on the outsourcing decision-making process. Barney suggested

leaders could gain a competitive advantage when internal resources (e.g., physical assets,

intellectual property, and technological and human capital assets) were valuable, scarce,

unique, and/or difficult to replicate in the marketplace. Researchers can use the RBV to

evaluate resource allocation to yield favorable results (Slepniov, Brazinskas, & Brian,

2013). Similarly, Nordigården et al. (2014), advocates of the RBV, reported that the

theory consisted of maintaining in-house the core competencies of an organization that

were difficult to imitate in the market.

Alderete (2013) confirmed the RBV when stating that SMEs leveraged external

resources to drive innovation because of the specialized knowledge and capabilities

offered by their third-party vendors. Tseng and Chen (2013) argued that management

could use the theory to focus on superior internal resources with operational experience

in outsourcing decisions, which better positioned leaders to execute various outsourcing

strategies for the overall outsourcing process. The theory was insightful when assessing

resource capabilities, but it did not address transaction cost inferences, the primary scope

of this research study. The RBV focuses on a single dimension of the outsourcing

decision, whereas other researchers (McIvor, 2009; Skiffington et al., 2013) have

combined related theories to gain an in-depth comprehension of the phenomenon.

Although scholars have considered TCE and RBV independent theories with

contrasting points, Slepniov et al. (2013) argued that the theories were complementary

and provided a holistic perspective of the outsourcing decision. Similarly, Brewer et al.

(2014) perceived that the TCE theory and the RBV harmonized to give one a clearer

understanding of outsourcing decisions. Brewer et al. (2014) added that researchers could

use the TCE theory to identify opportunistic behaviors, whereas the RBV was a better

predictor of outsourcing performance.

Skiffington et al. (2013) noted that both theories addressed a balanced perspective

between transaction cost and resource management related to outsourcing decisions.

Skiffington et al., leveraging the TCE theory and the RBV, developed an outsourcing

framework based on the success factors that they identified in their qualitative empirical

study. This framework was to guide SMEs in the New Zealand printing, publishing, and

packaging industries to identify the strategies used to manage their offshore production

operations.

Kivijärvi and Toikkanen (2015) developed a systemic framework for measuring

the business value of ITO that incorporated certain benefits (i.e., hard and soft savings

and cost avoidance) and costs (i.e., hidden costs, outsourcing costs, and monitoring

costs), along with uncertain opportunities (i.e., improved processes, better quality, and

focus on core competencies) and risks (i.e., loss of control, loss of current knowledge,

and information privacy). Kivijärvi and Toikkanen applied the TCE and RBV theories to

test the multidimensional characteristics of the framework with a multinational

corporation in the electronics industry. Their findings indicated inconsistent results on

various levels due to subjectivity and judgment-based inputs. However, the findings

provided a structured approach for evaluating business value. Skiffington et al. (2013)

argued that the strategies that SMEs used to manage their offshore activities successfully

included the following: (a) short-term contracts, which allowed flexibility to switch

vendors; (b) online reviews, which increased the likelihood of selecting an appropriate

supplier; (c) adequate vendor management oversight; and (d) long-term relationship

building with reliable suppliers.

McIvor (2009) combined the theories into a single outsourcing framework,

suggesting that the TCE theory provided awareness of opportunism, and the RBV

focused on resource optimization by internal or external sources. McIvor found that

outsourcing was beneficial when internal resources were inadequate, and asset specificity

was low. Maintaining resources in-house provided a greater benefit to organizations. The

theories provided different views on the outsourcing decision, but my research

exploration focused on a single view (i.e., transaction cost implications). Additionally,

combining the theories into a single framework enabled a holistic evaluation of the

phenomenon that was similar to enhancing or revising an existing theory.

While both the TCE and RBV theories focus on economic and internal resources,

the extended resource-based view (ERBV) offers a look into resources outside the

boundaries of an organization, such as supply chain linkages and inter-firm relationships

(Nordigården et al., 2014). Liu, Huo, Liu, and Zhao (2015) noted that the ERBV and the

organizational information processing theories featured resource and information

management implications. Liu et al. claimed that management could outsource logistical

services to third parties effectively if leaders used sound governance and control

mechanisms regarding information sharing and process coordination. Leaders use

information sharing and process coordination for different strategies of basic versus

customized outsourcing transactions. Toward this end, information sharing is beneficial

for complex and technical outsourcing, whereas process coordination is suitable for

routine, basic outsourcing. Therefore, examining a phenomenon through a dual-theory

lens should offer leaders a comprehensive view into a complex issue. Scholars have also

evaluated the dependency and resource capability implications of outsourcing decisions

(F. Su, Mao, & Jarvenpaa, 2014; Unal & Donthu, 2014).

F. Su et al. (2014) employed the resource dependency theory (RDT) to assess

client-demand shocks driven by environmental factors. The authors performed a multiple

case study to assess five pairs of relationships between Chinese vendors and their

Japanese clients to determine the strategies used to address client-demand shocks. The

researchers determined that success of the outsourcing transaction was contingent on

complexity, the position of power, and the reliance on limited resources.

Mwai, Kiplang'at, and Gichoya (2014) applied TCE and RDT in a multiple case

study strategy with four selected public university libraries in Kenya to assess resource

and risk implications associated with ITO. The authors discovered that the key drivers for

leaders of libraries to outsource their IT processes were to acquire new capabilities,

access innovative ideas, and acquire resources to perform tasks in an effective and

efficient manner, thereby lowering costs. Moreover, Unal and Donthu (2014) used the

resource advantage theory (RAT) to gain deeper insights into resource and absorptive

capabilities (i.e., the ability to transform external data or new knowledge into meaningful

information for making sound business decisions). These authors conducted a

quantitative empirical study on the relationship between absorptive capabilities and

outsourcing engagements with sales and marketing agencies and consumer packaged

goods companies. Their findings indicated that the complementary skills between the

client and vendor, as well as the willingness to learn from one another, increased

productivity and yielded higher performance.

Researchers have used the RDT to examine internal and external factors that

affect outsourcing decisions, whereas researchers use the RAT to assess resource

implications. Dependencies and resource capabilities are relevant considerations in

outsourcing transactions. Other scholars such as Wiengarten et al. (2013) and Jin Kim,

Shin, and Lee (2013) have applied contractual theories to analyze the governance

surrounding the outsourcing process in addition to incorporating relationship

management theories to assess key behavioral traits and soft skills needed to successfully

manage outsourcing.

Contract and relationship management theories. The contract theory enables

researchers to examine the legal and governance infrastructure of outsourcing

partnerships, which may provide insights into strategies for managing IT outsourcing

(Wiengarten et al., 2013). Wiengarten et al. (2013) performed a regression analysis, using

the TCE and contract theories. Wiengarten et al. concluded that one needed a holistic

approach to managing three determinants (risk, contract management, and governance) to

yield positive results.

Alternatively, researchers have used the psychological contract theory to focus on

the importance an individual’s perception plays with determining the outsourcing

outcome (Jin Kim et al., 2013). Jin Kim et al. (2013) argued that the effects of an explicit

legal contract and the quality of the client-vendor partnership on outsourcing results were

regulated by the client’s perception of whether a vendor breached a contract. Researchers

have used the contract theory to analyze governance and regulatory implications, whereas

they have used the psychological contract theory to add the human element of perception,

which might create a biased view of outsourcing results. Hence, business leaders should

not only consider the legal infrastructure of an outsourcing arrangement, but also the

relationship and psychological attributes that could influence the outsourcing results.

St. John, Vedder, and Guynes (2013) reported that the social exchange theory

(SET) was a relationship management theory primarily focused on relationship

equilibrium, with both parties encouraged to trade equal benefits (e.g., monetary reward

for quality service), assuming that trust and integrity existed between the parties. St. John

et al. (2013) performed an empirical study using the SET and the TCE theory to examine

correlations between client and vendor partnerships in IT offshoring. The results

indicated that trust was a key driver of equilibrium in these partnerships and had a

significant correlation to offshoring success.

St. John, Guynes, and Cline (2015) also supported combining both the SET and

the TCE theory to gain an in-depth understanding of outsourcing decisions. They stated

that the SET required mutual reciprocation between members of a partnership to maintain

a healthy balance in the relationship. The SET showed that business leaders must build

appropriate incentives in outsourcing contracts to yield a mutual exchange of quality

services and monetary reward. Thus, one identifying outsourcing strategies that promote

strong, positive client-vendor relationships centered on trust and integrity may contribute

to favorable outsourcing outcomes.

Qi and Chau (2015) developed a conceptual framework, leveraging the SET,

relational exchange theory, relational governance theory, and the TCE theory. More

specifically, the framework included the following relational and contractual dimensions:

trust, commitment, knowledge sharing, communication quality, contractual complexity,

and contract management. Qi and Chau (2015) tested the framework empirically and

confirmed that both effective contract and relationship management strategies were

significant to ITO success. Qi and Chau (2013) applied the SET and the TCE theory in an

empirical quantitative study of 143 firms located in Hong Kong to evaluate ways in

which trust influenced knowledge sharing, as well as client-vendor relationships.

Specifically, the authors evaluated interpersonal and inter-organizational trust to

determine the success factors for outsourcing IT services or processes. They asserted that

interpersonal trust had a direct correlation with knowledge sharing and improved the

duration of client-vendor relationships, hence leading to ITO success. In contrast, inter-

organizational trust did not have the same effect regarding knowledge sharing.

Additionally, Qi and Chau (2015) advanced that trust and the quality of

communication were significant factors in driving the success of ITO in China. However,

knowledge sharing and cost reduction did not have a significant influence on the success

of the outsourcing results. Strategies for improving the quality of outsourcing

relationships, including trust and effective communication, were key to driving a

successful ITO initiative. Therefore, scholars have extensively evaluated the client and

vendor dynamics related to outsourcing transactions (Gorla & Somers, 2014; Nuwangi,

Sedera, Srivastava, & Murphy, 2014).

Roses (2013) reported that the agency theory (AT) is a prominent relationship

management theory used in analyzing the principal (i.e., the outsourcing client) and the

agent (i.e., the third-party vendor) in outsourcing transactions. Gorla and Somers (2014)

used the expectancy–disconfirmation theory, the AT, and the TCE theory to evaluate their

quantitative research results. Their results showed support for the existence of an inverse

relationship between the scope of outsourcing IT processes and service quality to the

client. In other words, the larger the scope of the outsourcing IT project, the lower the

quality of service due to a lack of adequate vendor oversight and governance. In contrast,

their results showed a direct correlation between service quality and user satisfaction.

Nuwangi et al. (2014) applied the AT to determine appropriate strategies for

minimizing information asymmetry between a principal and an agent when outsourcing

information system development projects. The authors maintained that a statistical

significance existed between information asymmetry and opportunistic behaviors, which

increased transaction costs. In an outsourcing partnership, the vendor is to act in the best

interest of the client even though information asymmetry might incite opportunistic

behaviors. Business leaders must build the right levers (i.e., service level agreements

[SLAs] and incentives) in outsourcing contracts to manage the outsourcing process

properly. Management should also consider the levels of commitment and trust in

business relationships, as well as gain alignment with key business objectives, to deliver

favorable outsourcing results.

A critical success factor in outsourcing refers to the ability to conduct sufficient

due diligence in selecting a suitable business partner, who is committed and trustworthy

in delivering quality services (Watjatrakul, 2014). Roses (2013) established a

multidimensional vendor selection model that leveraged the TCE, AT, and the

commitment trust theory. The commitment trust theory shows commitment and trust as a

direct correlation to cooperative behaviors. The model includes regulatory (e.g., contract

terms, pricing, and SLAs), normative (e.g., contract laws, information exchange, and

flexibility), and cognitive (e.g., common language, metrics, and business requirements)

elements one can use to decipher vendor and client commitment and trust levels to select

suitable ITO partners. By testing the model using a case study on a Brazilian

transnational bank, Roses confirmed that the multidimensional model enhanced the

vendor vetting and due diligence in identifying a suitable ITO business partner.

Lempinen and Rajala (2014) employed the service-dominant logic principle,

which showed that key stakeholders co-created business value when their needs, goals,

and deliverables were sufficiently addressed throughout the entire process. The authors

determined that creating business value (e.g., innovation, cost reduction, process

improvement, and/or increased productivity) in IT services depended on effective client-

vendor relationships. Clear alignment of needs, goals, and interests should prevent

conflicts of unrealistic expectations, miscommunication, and asymmetric information

risk. Business leaders who are able to identify solutions that meet the needs of all

involved parties along with developing trust with their business partners will effectively

manage the various risks and likely achieve favorable business outcomes. Given the

importance of vendor selection, several scholars have established appropriate relationship

management frameworks (George, Hirschheim, & von Stetten, 2014; Lyons & Brennan,

2014).

Lyons and Brennan (2014) assessed outsourcing frameworks and recommended

that researchers should leverage or extend existing frameworks by adjusting various

aspects to address their respective research topics specifically. These authors asserted that

the majority of the existing outsourcing frameworks addressed the scope and governance

of outsourcing transactions. However, researchers have given limited attention to the

operational performance and relationship management aspects of the phenomenon.

George et al. (2014) proposed an enhanced social-capital framework derived from

a capital model developed by Nahapiet and Ghoshal (1998) to evaluate client-vendor

relationships in ITO. The framework comprised structural, cognitive, and relational

constructs to assess the interaction and exchange elements of business partnerships.

George et al. asserted that the new model would assist in closing the gap in understanding

ITO success throughout the various outsourcing stages. Business leaders who are able to

execute strategies that benchmark and examine multiple dimensions of the outsourcing

process are better positioned to lead successful ITO engagements. Therefore,

management must continuously monitor outsourcing processes to make the necessary

adjustments to yield positive business outcomes.

Researchers have expressed the importance of identifying the root causes of

breakdowns in outsourcing and building effective client-vendor relationships to

developing successful ITO projects (Yu & Shiu, 2014). Mirani (2013), using the

adaptation of morphogenesis theory and the Archer morphogenetic framework,

performed a longitudinal, exploratory case study over a 6-year period with a U.S.-based

global financial information products and services company. Mirani evaluated and

assessed the morphogenetic changes (evolving from failure to success over a three-phase

maturity cycle) of offshore outsourcing IT application vendors. Mirani found that

management experienced project failure due to a poor vendor selection process, which

they eventually corrected during their three-phase cycle, resulting in a successful

outcome.

Moe, Šmite, Hanssen, and Barney (2014) applied the theory of learning when

performing a multiple longitudinal case study involving Scandinavian software

companies. These companies transitioned from offshoring their software development

processes with Asian service providers to either insourcing or switching partnerships to

other strategic vendors. Their findings showed that reshoring or developing new business

partnerships were viable solutions to addressing failed offshore relationships if

implemented appropriately. More specifically, by reshoring or developing new business

partnerships, leaders could gain greater influence over human and social capital to result

in higher quality and improved performance. By implementing strategies to build

effective client-vendor relationships, business leaders can minimize risk exposure and

deliver business value. Numerous researchers have also used rival theories linked to the

TCE theory to assess outsourcing decisions (Slepniov et al., 2013; St. John et al., 2013).

Rival theories. Researchers have contended that the TCE theory alone is

inadequate for evaluating complex outsourcing decisions (Slepniov et al., 2013; St. John

et al., 2013). Thus, some researchers have used a combination of theories, develop their

own constructs or enhance existing theories to gain thorough perspectives on this

complex phenomenon. Scholars have further asserted that ITO is complex to understand

through a single theoretical lens, thereby suggesting that the phenomenon should dictate

an endogenous ITO construct (Patil & Wongsurawat, 2015; Schneider & Sunyaev, 2016).

Understanding a vendor’s capabilities would better equip leaders in determining

the appropriate strategy for managing outsourcing (Watjatrakul, 2014). M. Zhang, Pawar,

Shah, and Mehta (2013) applied the theory of dynamic capability to evaluate a multiple

case study with a European pharmaceutical company and four contract research and

manufacturing organizations over a 12-month period. M. Zhang et al. discovered that the

outsourcing client built fully integrated strategic partnerships with vendors who had high

dynamic capabilities, including superior project management skills, exceptional

intellectual property, and proven track records. On the contrary, the outsourcing client

executed short-term straightforward outsourcing relationships with suppliers who had

good operational capabilities, including execution of key functional tasks such as R&D,

manufacturing, marketing, and distribution. Overall, the vendors played different roles in

the outsourcing relationship, depending on their dynamic and operational capabilities.

Therefore, one determining vendor capabilities was critical in identifying appropriate

strategies to manage outsourcing. Hence, using robust vendor selection tools would place

certain business leaders in a competitive advantage.

Several researchers have applied fuzzy methodology (i.e., quantitative, statistical

models to evaluate many-valued logic to prioritize selections) to select suitable vendors

for the outsourcing engagement (D. F. Li & Wan, 2014; Rouyendegh & Saputro, 2014).

Rouyendegh and Saputro (2014) combined two integrated theories, fuzzy technique for

order preference by similarity to ideal situation and multichoice goal programming, into

one common framework. The framework included qualitative and quantitative

multivendor selection criteria to evaluate, select, and prioritize appropriate vendors.

Rouyendegh and Saputro argued that by employing an efficient, multicriteria vendor

selection tool, management could gain a competitive advantage by identifying suitable,

long-lasting business partnerships with vendors who delivered goods in a timely fashion,

while adhering to high-quality standards.

D. F. Li and Wan (2014) leveraged the fuzzy heterogeneous multiattribute

decision-making linear programming method to draft a new fuzzy heterogeneous, linear

programming model to correct the deficiencies in existing fuzzy models to rank vendors

better by order of importance. This method allowed one to select the most appropriate

third-party vendors to engage in outsourcing initiatives. Business leaders who implement

effective strategies for vetting and selecting vendors are likely to achieve long-term

strategic partnerships in which the vendors are reliable and committed to delivering

timely, high-quality service. One of the key outcomes in effectively managed outsourcing

is improved organizational performance. Thus, scholars have studied the performance of

outsourcing clients compared with that of their peers who choose not to outsource

(Agrawal & Haleem, 2013).

The primary motivations for outsourcing a process are to lower cost and improve

overall firm performance (i.e., increase productivity, gain efficient operations, and deliver

higher-quality service to customers; Gozman & Willcocks, 2015). Agrawal and Haleem

(2013) used performance metrics, including cost efficiency, productivity, profitability,

growth, cash management, and market ratio, to analyze firm performance in ITO. The

researchers conducted a quantitative empirical study examining pre and post-financial

data within firms (i.e., treatment group) that outsource IT processes, comparing these

with similar companies (i.e., the control group) that did not outsource operations. Their

study results indicated that the treatment group typically demonstrated higher

performance metrics compared to the control group for efficiency, productivity,

profitability, growth, market ratio, and firm value.

Conversely, Agrawal and Hall (2014) performed a similar empirical study within

two industries: manufacturing and service. The manufacturing businesses in the

designated treatment group demonstrated greater efficiency in cost, productivity, and

cash management compared with the treatment group for the service companies. Business

leaders who employ effective outsourcing strategies are more likely to achieve better

business performances compared to their competitors who choose not to engage in such

activities. However, managers may achieve different outsourcing results depending on

their industries, and business leaders who execute poor outsourcing strategies may

probably yield unfavorable results.

Jørgensen (2014) performed a binary regression analysis on 785,325 small-scale

IT software outsourcing projects. The researcher evaluated client and third-party provider

attributes about collaboration, satisfaction, and skills to determine when and why projects

failed, as well as the contextual aspects during the initial decision-making process that

might increase the likelihood of project failure. Jørgensen argued that third-party vendor

skills or capabilities, rather than low price and vendor failure rates on prior engagements,

were predictors of high risk of failure. Furthermore, the study results indicated that

adequate training, relevant skills, and experience were equally important for both the

client and vendor to mitigate project failure risk.

Jain and Khurana (2013) evaluated existing literature related to ITO and existing

outsourcing decision-making models used by Indian vendors to manage their global

clients. The authors concluded that there was a need to develop a comprehensive IT

software outsourcing business model. They built one that incorporated several factors: (a)

a clear understanding of the client organization; (b) heightened awareness of potential

hidden costs; (c) cultural and time zone differences; (d) data privacy and information

security concerns; and (e) contractual, legal, and regulatory implications. Business

leaders must evaluate the past performance of their potential vendors and the skills and

experiences of the outsourcing team to determine the various risk implications prior to

implementing outsourcing or offshoring strategies. Scholars have also assessed the

sustainability of India’s leadership position for offshoring, including interrelated

components of strategy, risk, and cost benefits, as well as the readiness of new players

entering the offshoring market (Chakraborty & Kumar, 2013; Patil & Wongsurawat,

2015).

Chakraborty and Kumar (2013) utilized the endogenous growth theory (i.e.,

economic growth achieved through productivity derived from innovation) and the

economic theory (i.e., a forecast of the economic growth rates of countries that would

produce higher return on investments) to analyze India’s ability to sustain future success

as the leader in offshore outsourcing. They found that for India to sustain its market

leadership position in offshoring, especially in IT services, business leaders must address

their depleting talent pools, technology infrastructure in second-tier cities, competition

from other developing nations that are improving English and capabilities, and improve

its business environment regarding red tape and corruption.

Patil and Wongsurawat (2015) developed an ITO framework to analyze

interrelated components, such as strategy, risk, and cost benefits. The researchers

cautioned that a limited focus on cost reduction rather than all three components during

ITO decisions was not prudent and could result in poor quality or even loss of business.

In addition, Schneider and Sunyaev (2016) derived determinant factors of cloud-sourcing

decisions, such as the specific asset, solution (i.e., a cloud service), technology (i.e., cloud

and ITO), client (i.e., firm size and capabilities), and environment (i.e., uncertainty and

opportunism).

Adelakun and Iyamu (2013) established a readiness and attractiveness framework

for outsourcing clients to evaluate and determine appropriate offshore service providers

and tested the framework by conducting a detailed interpretive analysis of more than 50

IT managers located in South Africa. Their study results indicated that South Africa was

an attractive offshore location, primarily due to its cultural and political factors.

However, the country was not ready to serve clients in Western countries due to the

limited competent technical resources and insufficient government incentives. Business

leaders must gauge the global and competitive landscape to determine potential business

partners that could reduce cost and increase performance, as well as implement strategies

that manage the interrelated components that link the outsourcing process.

Researchers have examined diverse aspects of outsourcing related to transaction

cost, resource management, contract management, and relationship management (Brcar

& Bukovec, 2013; Pratap, 2014). Scholars have also used existing theories, enhanced,

combined, or developed new theories to gain a deeper understanding of the outsourcing

decision (Brcar & Bukovec, 2013; Pratap, 2014). Researchers could use the TCE to

enable further insights into transaction cost implications, which was the focus of this

research study.

Types of Outsourcing

Different types of outsourcing are designed to achieve various business goals and

priorities. One type of outsourcing is BPO, which occurs when a third-party vendor

performs all or part of a process that internal resources once performed (Brcar &

Bukovec, 2013; Pratap, 2014). Another type of outsourcing is CM, which involves one

manufacturer’s acting on behalf of the OEM to produce a product or a component of a

product (Brewer et al., 2013a). Additionally, S. Li et al. (2014) defined sustainable

outsourcing as the ability of business leaders to outsource products and/or services to

designated vendors to achieve social, environmental, and economic business objectives,

resulting in a positive triple bottom line. Many researchers have examined different types

of outsourcing that are designed to achieve diverse business objectives (Brcar &

Bukovec, 2013; Brewer et al., 2013a; S. Li et al., 2014). Regardless of whether business

leaders are outsourcing or offshoring certain functional activities, there are numerous

reasons leaders may want to terminate a partnership or a contractual arrangement to bring

certain processes back in-house.

Business leaders must be prepared to pivot if an outsourcing arrangement is not

meeting expectations or if the competitive and regulatory landscapes have changed

significantly. Backsourcing is the opposite of outsourcing and refers to the process of

reintegrating production, processes, or services in-house that an external third-party

supplier once performed (Cabral et al., 2014; Nagpal, 2015). Furthermore, Skiffington et

al. (2013) defined the opposite of offshoring as reshoring, which entailed bringing

processes or services back in-house that vendors previously performed in different

countries from the client’s country. It is imperative that business leaders devise exit

strategies when outsourcing and determine the appropriate outsourcing arrangements for

achieving their business goals and objectives.

Offshoring. Gonzalez, Llopis, and Gasco (2013a), as well as Larsen (2016),

stated that offshore outsourcing involved one transferring processes to a third-party

service provider located abroad. Offshore outsourcing entails foreign production of goods

and/or services of equal or superior quality as those produced within the client’s home

country but more cost-effectively (Almeida & Meneses, 2013; Chipalkatti, Buchanan,

Koch, & Doh, 2014). In general, leaders use geographic boundaries to distinguish

offshoring from outsourcing. Certain critical factors, such as technological advancements,

have empowered business leaders to shift more of their domestic business operations

abroad.

Technological advancements in computers and the Internet have enabled U.S.

organization leaders to conduct business overseas much more easily compared to before

(Jackson, 2013), and advances in digitalization have facilitated the transfer of large

volumes of data without affecting service quality (Gorla & Somers, 2014). Business

leaders have assessed enhancements to technology to determine whether offshoring is

appropriate for meeting their business goals. Schwörer (2013) and Iqbal and Dad (2013)

noted a migration of U.S. business operations to other parts of the world.

Schwörer (2013) reported that production within the United States decreased to

4.5%, resulting in a rise in offshore outsourcing arrangements. Furthermore, Iqbal and

Dad (2013) asserted that Western countries would continue to experience job losses due

to the low-cost value propositions from offshore vendors. Leaders often have motivation

to offshore certain business operations to reduce cost without sacrificing the quality of

the product or service. Business leaders have viewed offshoring as a cost-effective

venture to increase profitability and improve enterprise performance. Toward this end,

researchers have forecasted that offshoring would increase in the future, especially within

the Asia-Pacific region (Ahsan, 2013; Chipalkatti et al., 2014).

The Asia-Pacific region has benefited the most from offshoring activities. Ahsan

(2013) reported that offshoring of services, such as financial data, IT, and

telecommunications, grew steadily since 2000 in the region, and would continue to do so.

Chipalkatti et al. (2014) found that 60% of the companies surveyed were offshoring and

aggressively planning to expand operations to capitalize on offshoring’s strategic and

economic benefits to sustain competitive advantages. Scholars have also noted that

business leaders would continue to expand their offshoring operations in the future,

despite politically charged viewpoints (Grappi, Romani, & Bagozzi, 2013).

Offshoring has been a political topic for debate and politicians discussed

exhaustively during the 2016 United States Presidential elections. Grappi et al. (2013)

stated that consumers responded positively to business activities maintained in-house and

negatively to offshored activities. They argued that consumers felt threatened when U.S.

jobs were shipped overseas, primarily for financial motives, without consideration of the

potential impacts on the U.S. workforce and economy. In contrast, leaders in emerging

markets, especially in the Asia-Pacific region, have experienced surges in their

economies due to job growth and expansion. In particular, India is the leading recipient of

offshoring jobs, particularly in IT, because of a number of government and business

factors.

Chakraborty and Kumar (2013) stated that during the decade from 2000 to 2010,

India emerged as the global leader in offshoring due to government incentives,

technology infrastructure, and its educated English-speaking population. Temkar (2015)

also identified India as a preferred destination for the offshore outsourcing of IT services

due to the (a) large pool of educated and skilled workers, chiefly in the areas of

technology, science, and math; (b) low cost; and (c) technological capabilities. Business

leaders in multinational organizations have engaged with India to perform offshore

activities at a fraction of their domestic costs. Moreover, scholars have cautioned leaders

in India to address certain known deficiencies to sustain the country’s leadership position

in the global marketplace (Chakraborty & Kumar, 2013; Javalgi et al., 2013).

Javalgi et al. (2013) reported that the comparative advantages for conducting

offshoring activities with Indian vendors included (a) superior technical knowledge in

math, science, and technology; (b) world-class educated workforce; (c) entrepreneurial

spirit; (d) proficiency in English; and (e) democratic government. The authors also

posited that the primary concerns with offshoring with Indian vendors entailed (a)

political indifference, mainly regarding foreign policy; (b) corruption; (c) inflation; (d)

bureaucracy; (e) economic disparity or the class system; and (f) global competition.

Innovation and technology growth would enable business leaders in India to

sustain future offshoring success (Chakraborty & Kumar, 2013). However, Chakraborty

and Kumar (2013) also argued that for India to continue its market leadership position in

offshoring, the country must address (a) the depletion of the Indian talent pool, (b) the

poor technology infrastructure in second-tier cities, (c) the competition from other

developing nations that were improving English and technical capabilities, and (d) the

corruption in the Indian business environment. Leaders of India must address identified

areas for improvement to maintain a top position for offshoring activities. Other

emerging market leaders are eager to gain market shares in the offshoring arena and may

threaten India’s leadership position over the long-term (Osadchyy & Webber, 2016).

Iqbal and Dad (2013) cautioned that new low-cost third-party providers would

emerge and challenge India’s leadership position in offering IT services to multinationals.

Osadchyy and Webber (2016) determined that the most popular offshore destinations

were currently India and China, but several new emerging markets, such as Ukraine, were

now offering low-cost services with technical expertise and additional capabilities that

were currently untapped and undervalued. Emerging market leaders outside the Asia-

Pacific region have built capabilities to compete in the global marketplace; hence,

innovative company leaders have begun to explore other emerging markets to offshore

their IT processes.

As new emerging markets, such as the Baltic region, establish incentives and

develop specific capabilities, the threat of diverting foreign partners to other parts of the

world may occur (Almeida & Meneses, 2013; Slepniov et al., 2013). For instance,

Chipalkatti et al. (2014) stated that companies, such as Google and Hewlett-Packard,

were already expanding offshore IT services to Ireland due to the skilled labor force and

tax incentives. One of the key offshore services is IT, which business leaders expect to

drive operational efficiencies, in addition to a positive bottom line.

ITO. Shemi et al. (2015) and Agrawal and Hall (2014) defined ITO as the transfer

of IT tasks, such as operations, infrastructure, application development, and maintenance,

to external service providers to improve performance and/or reduce cost, and can occur

either domestically or offshore (Brcar & Bukovec, 2013; Kivijärvi & Toikkanen, 2015).

Kivijärvi and Toikkanen (2015) reported that business leaders tended to offshore IT

processes, such as call center activities, programming, software testing, and research and

development, as well as complex activities (e.g., product development and software

architecture design). Prawesh, Agrawal, and Chari (2016) added that leaders entered

different types of ITO contracts to meet various business objectives, such as application

management, system integration, and network and desktop maintenance.

Akhisar, Tunay, and Tunay (2015) stated that bank managers outsourced IT

processes to increase efficiencies, particularly during the initial stage of technological

innovation, such as establishing online banking that could reduce transaction costs by

40% to 80% over using bank tellers. Information-intensive sectors, such as the financial

services industry, that handle large volumes of data require innovative IT solutions to

operate efficiently (Gonzalez, Llopis, & Gasco, 2013b). Gonzalez et al. (2013b) reported

that financial services operations involved numerous simple and repetitive tasks (i.e.,

payment processing, check processing, call centers, accounting services, and cash

management) that managers could standardize through ITO solutions.

Since the 1980s, technology is constantly changing and has evolved rapidly to

facilitate the outsourcing of IT processes, including shifting from mainframes and client

servers to web-based and cloud-based systems (R. D. Johnson, Lukaszewski, & Stone,

2016). St. John et al. (2013) noted that business leaders have continued to increase the

volume of IT business being offshored, given the technological advances that enabled

ITO. L. Zhang and Gu (2013) defined the cloud as a metaphor for the Internet; moreover,

Schneider and Sunyaev (2016) and Pattnaik, Prusty, and Dash (2016) stated that cloud

service models comprised hardware, development platforms, and applications, along with

private, public, and hybrid cloud services. Therefore, ITO is a widespread practice in

global business (Alexandrova, 2015). Lacity and Willcocks (2014) reported that global

ITO revenue exceeded $290 billion in 2013, and they forecasted continued growth

through 2016.

IT includes a number of standard processes and systems. Lempinen and Rajala

(2014) reported that the main IT processes, critical to any organization, included

information management, project management, software and application development,

system implementation, maintenance, and technical training. They asserted that

information management staff was primarily responsible for company data administration

and organization. The project management area managed IT projects from start to finish,

and both software and application development and system implementation pertained to

the system development life cycle, including testing, production, and change

management. The IT maintenance area handled routine and scheduled technology

maintenance, and the training area conducted technical training with key stakeholders.

Patil and Patil (2014) added that IT management considered operations and

business support systems the “collective backbone” of IT. The authors argued that IT

leaders considered the majority of IT support systems operational in nature, primarily

used for customer, employee, and transactional processing, as well as business support

systems process transactions related to billing, customer care, and business management.

Separately, Prawesh et al. (2016) determined that IT infrastructure services included

networks, hardware and communication, technical and security support, managerial

support, and organizational data support. The key IT competences needed to successful

execution of IT development and application include business and technology

knowledge, operation management, performance management, flexibility thinking,

project management, and risk management (Lee & Park, 2017).

MacKerron et al. (2015) reported that many service industry leaders, including

financial services (e.g., banking, asset management, and insurance), outsourced back-

office operations to improve process efficiencies. Clark and Monk (2013) added that

financial institutions possessed limited tangible and fixed assets, thereby managing

human capital, governance procedures, and the information-processing infrastructure that

supported human capital and decision-making. Wright (2015) stated that business leaders

in the financial services industry were motivated to outsource middle- and back-office

operations to solve operational, regulatory, risk management, and commercial challenges

in order to redeploy resources to focus on core competencies.

Robertson and Novek (2014) reported that prior to the financial crisis of 2008 and

2009, U.S. and European banks experienced high profitability and double-digit returns on

equity (ROE; i.e., 19% in 2006). However, since the financial crisis, bank leaders operate

under a so-called new normal of diminished profits and single-digit ROE (i.e., ~9% in

2013 and 2014), and business leaders have sought solutions, such as outsourcing and

offshoring to improve profitability. The authors noted that many leaders of financial

institutions successfully offshored 40% to 60% of their finance and accounting activities.

These included general and fixed-asset accounting, accounts payable, travel and

expenses, financial systems, and bank reconciliation. Business leaders in financial

services are outsourcing and offshoring to increase profitability and improve

performance.

Wright (2015) explained that financial services regulators were concerned about

solvency and continuity of services, and therefore recommended or mandated vendor

oversight models that included contract management and governance principles.

MacKerron et al. (2015) reported that the financial services industry was highly regulated

by governing bodies that payed close attention to supplier dependence and legal and IT

risks. They noted that the Statement of Auditing Standards 70, an international standard

for independent evaluation of third-party internal control systems, was a key report used

to assess vendors’ processes and controls.

Gozman and Willcocks (2015) stated that managers have increased outsourcing

and offshoring activities across organizations, including the back-office (i.e., custody and

unit value accounting), middle-office (i.e., trade services, data management, and record

keeping), and front-office (i.e., client servicing and strategy formation) operations. The

authors argued that leaders using these outsourcing arrangements have gained increased

scrutiny by financial services regulators who have wanted to ensure that leaders robustly

managed these arrangements. Business leaders must consider the regulatory landscape in

which they do business to manage outsourcing effectively, as well as comply with the

various laws and regulations. A key sector within the financial services industry is

insurance.

Cummins and Weiss (2014) reported that the insurance industry comprises two

sectors, life and health, and property and casualty (P&C). The core activities for

insurance companies included underwriting, reserving, claims settlement, annuity

distributions, and reinsurance, while some of the noncore activities included financial

guarantees, asset lending, issuing credit default swaps, and investing in complex

structured securities (Cummins & Weiss, 2014). Additionally, Clark and Monk (2013)

noted that insurance company balance sheets consisted of general account assets (i.e.,

bonds, stocks, loans, cash, and reinsurance receivables), separate accounts (i.e., an

account separate from the GA primarily used to account for variable annuities), and

liabilities and equity (i.e., reserves, deposits, borrowed funds, notes, and equity).

In 2012, the majority of assets comprised long-term bonds (i.e., 56% of P&C

assets and 71% of life and health assets) with average maturities of 6.3 and 10.2 years,

respectively (Cummins & Weiss, 2014). The primary liabilities included loss and policy

reserves, which accounted for 78.9% for the P&C sector and 87.5% for life and health in

2012. For my research purposes, I explored a qualitative single-case study in the life and

health sector of the insurance industry. Understanding the end-to-end outsourcing

process, including the required actions within each phase of the process, was imperative

for effectively managing the ITO process.

Outsourcing Process

There is no clear guidance or strategies regarding systematic management of

outsourcing. Many researchers have stated that the main phases of the outsourcing

process include (a) the precontract phase, (b) contract execution and management, and (c)

vendor management and oversight (Al-Ahmad & Al-Oqaili, 2013; Bruna, Borchardt,

Pereira, & Almeida, 2014). Business leaders must identify appropriate strategies within

each phase of the process to manage the process successfully. Hence, understanding the

outsourcing process was essential for identifying the different strategies needed to

manage the end-to-end process effectively.

In addition to the phases discussed above, Marchewka and Oruganti (2013) stated

that IT outsourcing involved two phases: configuration and operationalization. The

configuration phase involves precontract activities, such as determining the outsourcing

strategy, selecting the vendor, drafting the contract terms and conditions, creating SLAs,

and establishing the governance infrastructure. The operationalization phase is the

transition of in-house activities or knowledge to the vendor, and then performance,

contract, and vendor relationship management. Scholars have drafted frameworks and

models to guide business leaders through the outsourcing process (Bayrak, 2013; Mann,

Folch, Kauffman, & Anselin, 2015).

Bayrak (2013) developed an outsourcing framework to assist leaders in making

more informed business decisions surrounding ITO. The step-by-step framework

included (a) identifying the perceived benefits and risks, (b) evaluating the attitude

toward IT outsourced activity, and (c) determining the intention of use. Gonzalez et al.

(2013b) developed an ITO framework to guide leaders in making sound business

decisions. The framework included four considerations: (a) ITO configuration comprised

the scope of outsourcing services, number of intended service providers, financial scale,

price structure, contract length, resource ownership, and client-provider relationship; (b)

ITO enabled leaders to focus on strategic issues, increase flexibility, improve IT services,

eliminate routine tasks, facilitate access to technology, reduce the risk of obsolescence,

reduce cost, and remain competitive; (c) ITO risks related to provider staff qualifications,

contract breaches, service dependence, loss of technical knowledge, provider inability to

adapt to new technologies, hidden costs, unclear cost-benefit relationships, security

issues, staff issues, and irreversibility of the ITO decision; and (d) the decision to

outsource IT domestically or abroad.

Mann et al. (2015) stated that initiating an ITO engagement was a straightforward

business choice, but implementation and management oversight were complex. The

authors developed an outsourcing framework that included practical steps, such as

determining what activities to outsource or maintain in-house, vetting and conducting due

diligence with external contractors, and performing cost-benefit analyses. The researchers

performed a spatial, temporal, and industrial proximity analysis to explore the increasing

use of ITO in the United States. Mann et al. used unique data on ITO public

announcements between the period of 2000 and 2010 and space-time clustering (i.e., sets

of events that occur during a particular space and time) methods to identify contagions.

The study results were inconclusive because the data were diverse and subjective, and

thus difficult to quantify.

MacKerron et al. (2015) developed the following 10-step framework to manage

the outsourcing process, beginning with problem identification through operationalizing

vendor governance. Specifically, business leaders could use the framework to (a) identify

the business problem; (b) evaluate the issue to determine outsourcing or offshoring

options; (c) analyze internal and external capabilities, and then decide on the cost-

effective option; (d) develop the business case for the designated options (i.e., outsource,

offshore, or maintain in-house); (e) obtain business case approval from senior leaders; (f)

gather business requirements; (g) select appropriate vendors; (h) draft contract terms and

conditions; (i) determine appropriate SLAs; and (j) perform vendor governance.

Pratap (2014) developed a conceptual framework that comprised flexibility,

absorptive capacity, relationship, and monitoring to facilitate efficiently managing

outsourcing. The author suggested that business leaders should (a) build organizations

that were flexible and agile to changes in the marketplace, (b) establish trust and promote

knowledge sharing with preferred suppliers, and (c) monitor performance via SLAs.

Separately, Krstic and Kahrovic (2015) established a model for BPO that involved four

steps: (a) organizing a BPO team, (b) performing a business process analysis to determine

areas to maintain in-house and areas to outsource, (c) evaluating the identified options for

BPO, and (d) presenting the proposed BPO plan to senior leaders for review and

approval. Bayrak (2013) and Gonzalez et al. (2013b) stated that IT outsourcing

frameworks provided extensive insights into key outsourcing steps but lacked details on

how to perform the tasks. Business leaders must keep the end in mind when

benchmarking various frameworks or models to achieve successful business outcomes.

Al-Ahmad and Al-Oqaili (2013) conducted a case study with leaders of a Jordan

airline who outsourced their information systems for several years to determine an

appropriate conceptual framework for facilitating outsourcing and reversibility decisions.

The authors reported that successful outsourcing entailed the following:

• A strategy for reversing the outsourcing partnership drafted during the early

stages of the process;

• Identifying, assessing, and mitigating key risks in the pre-outsourcing stage;

• Training, empowering, and compensating the outsourcing team; and

• Maintaining open communication between client and vendor for the duration

of the engagement.

Furthermore, Al-Ahmad and Al-Oqaili contended that business leaders would more likely

see positive results from outsourcing if there was effective risk management, an exit

strategy, training, performance management, and communication from the early stages of

the process. Outsourcing IT is complex given the technical nature of the functions where

the scope of outsourcing activities is likely to evolve along the maturity curve.

One must clearly define the IT outsourcing process from end-to-end to execute it

carefully throughout. The process was composed of the following segments: (a) IT

demand, application maturity status, and department performance evaluation; (b) IT

development and programming; (c) outsourcing strategy; (d) project approval; (e)

contract design and outsourcing provider selection; (f) contract negotiation; and (g)

implementation and supervision (D. F. Li & Wan, 2014). Solli-Sæther and Gottschalk

(2015) developed a sourcing model for IT functions that comprises five maturity stages:

(a) in-house staff, (b) in-house service, (c) outsourced, (d) offshored, and (e) reshored.

Additionally, the authors designed the model to identify the dominant IT challenges

related to cost, resources, and partnership relationships. Managers can use the model to

identify maturity, predict future challenges, and anticipate appropriate actions as the

organization leaders continued to change and evolve. The focus of this research involved

exploring strategies for managing offshore IT outsourcing, which had both advantages

and challenges that one must address for favorable results.

Advantages and Challenges of Outsourcing

Martin and Poussing (2014) asserted that IT was not the core competency for

most firms. Therefore, it is cost-effective to outsource IT processes to experts who are

more equipped to drive profitability and operational efficiencies. The authors added that

leaders of larger firms that were information intensive, such as financial services

companies, tended to outsource at least some of their IT operations to remain

competitive, acquire IT capabilities, and reduce cost. Gonzalez et al. (2013b) reported

that the primary drivers of outsourcing financial services IT involved modernizing

financial systems, controlling costs, meeting regulatory requirements, focusing on core

competencies, and sustaining competitive advantage. Toward this end, Bank of America

outsourced its IT processes to acquire knowledge from its vendor, as well as to reduce

cost, save time, and produce better-quality programming (Teo & Bhattacherjee, 2014).

Gozman and Willcocks (2015) stated that business leaders in the financial

services industry have implemented outsourcing and offshoring strategies to reduce cost

and increase operational efficiencies. Brandl (2017) conducted a multiple case study with

one conglomerate to determine if offshore knowledge-intensive services created direct

and/or indirect value to the client and service provider. The researcher discovered that

clients and service providers receive direct (e.g., expected value, such as reduced cost,

higher quality, and new capabilities) and indirect (e.g., client enhanced understanding of

their own problems and operations; improved international team coordination and

communication; service provider increased knowledge about the client; improved

problem-solving strategies; better understanding of perceived quality; and enhanced team

coordination and communication) value when offshoring knowledge-intensive services.

Tarn (2015) argued that business leaders did not offshore and outsource solely

tangible resources, such as products and IT software, but they acquired intangible

resources, such as goodwill, technical knowledge, consultancy services, and intellectual

property. Kivijärvi and Toikkanen (2015) stated that the key benefits for ITO included

cost savings, access to new IT solutions, and access to technical capabilities, but business

leaders must mitigate exposure to contract risk, future price risk, transaction costs, and

loss of knowledge in the organization. Ravishankar, Pan, and Myers (2013) and Parmer

(2015) reported that the main drivers of Western companies’ offshoring IT services

involved one achieving economic benefits, thereby resulting in improved profitability.

Fogarty and Bell (2014) posited that business leaders who offshored or outsourced

capabilities unavailable in-house, such as big data analytics, might acquire cost-effective

services to sustain a competitive advantage, while other business leaders might decide the

risk was too high, thereby developing the capabilities internally to safeguard intellectual

property.

Schwarz (2014) conducted an empirical study on practitioners and academic

experts to determine the top success criteria for ITO. Schwarz identified the success

attributes as (a) increased business capabilities, (b) timely achievement of business goals

and objectives, (c) improved quality, (d) flexibility and agility in the face of marketplace

changes, (e) a mutually beneficial business partnerships, (f) mutual satisfaction, and (g)

meeting or exceeding SLAs. In addition, Marchewka and Oruganti (2013) maintained

that managers used outsourcing to decrease costs, improve productivity, and increase

flexibility and innovation by capitalizing on third-party resources, including expertise and

technical capabilities.

Pattnaik et al. (2016) reported that the advantages of cloud sourcing included

reduced cost, usage-based billing infrastructure, business continuity, flexibility in

business model, and green IT. The authors added that cloud services enabled leaders of

financial services companies to focus on their core competencies, such as growing assets,

serving customers, designing and launching new product offerings, and reducing capital

charges. One must note that IT is typically not the core business for financial services and

insurance companies; therefore, IT might be more effectively outsourced to allow for a

focus on core competencies.

Business leaders must have awareness of the pitfalls when making outsourcing

decisions. Handley and Benton (2013) performed a quantitative empirical study on the

influence of task and location complexity on control and coordination costs in global

outsourcing relationships. The study included dyadic data on 102 U.S.-based outsourcing

clients and their respective domestic or offshore outsourcing service providers related to

information technology, logistics and supply chain, and other business processes. The

authors’ hypothesis was that the scope of work and the geographic distance between the

client and vendor have direct correlations with both control and coordination costs.

Handley and Benton also concluded that the following key drivers led to failed

outsourcing ventures: (a) a lack of understanding of complex client needs, (b) poor

communication, (c) inadequate contractual terms and conditions, and (d) insufficient

vendor oversight.

Letica (2014) performed a quantitative empirical study and confirmed a

statistically significant positive correlation between sound contract management or legal

framework and outsourcing success. The author argued that offshoring presented a higher

failure rate in countries with less developed capital markets due to the lack of experience

in offshoring transactions. Moe et al. (2014) found that the primary reasons for failed

offshore arrangements included low service quality and poor vendor relationships.

Therefore, poor business relationships and a lack of sound governance could increase the

probability of outsourcing failure.

Failed outsourcing projects are costly and can create major disruptions to

businesses (Cabral et al., 2014). Jørgensen (2014) defined outsourcing failure as an

incomplete project or projects that resulted in low customer satisfaction. Jørgensen

(2014) created a binary-regression model that correctly predicted that 74% of project

failures were attributable to the historical satisfaction rate of the vendor and the client in

addition to the vendor skills assessment results. The author also found that the historical

project failure rate with a third-party vendor for ITO had a direct correlation with the

likelihood of project failure in the future by approximately 51%.

Horn, Schiele, and Werner (2013) determined that business leaders could measure

success by both reduced overall costs and call-off ratios of 75% or greater, with the call-

off ratio reflecting goods received versus budgeted volumes. Hence, a low ratio indicated

challenges on the outsourced project. Horn et al. discovered that failed projects often led

to ugly twins, a term that referred to Western countries outsourcing to low-wage countries

(e.g., India, China, and Mexico) but eventually reassigning the same projects to suppliers

in high-wage countries (e.g., the United States, Europe, and United Kingdom). This

reassignment resulted in higher replacement or switching costs and less favorable

contractual terms and conditions. Moreover, the researchers noted that the Chinese

vendors who promised to deliver high-quality goods at low cost often failed to fulfill their

commitments.

Horn et al. (2013) conducted an analysis of a western European equipment

manufacturer that offshored 214 projects to China, between 2008 and 2010, finding that

less than 25% of the projects were successful regarding operational and financial

performance. Cabral et al. (2014) conducted a case study on a Brazilian company in the

industrial maintenance industry. Cabral et al. concluded that the reintegration of services

was due to outsourcing failures related to asset specificity, poor contract design,

insufficient monitoring and oversight of key vendor activities, failure to deliver actual

cost savings, and increased labor regulation laws.

Lacity and Willcocks (2013) conducted a qualitative study on outsourcing legal

services with 27 legal process outsourcing providers. Participating providers stated that

having a balanced team composition, including onshore and offshore resources, enabled

vendors to provide competitive pricing without jeopardizing quality of service. The key

success factors that Lacity and Willcocks (2013) reported for outsourcing legal services

included (a) focusing on quality of services rather than the lowest-cost provider, (b)

developing a contingency plan for potentially high turnover of service provider staff, and

should build contingency plans or exit strategies when offshoring to minimize higher

switching costs if the relationship is not a good fit. Given the complex intricacies of the

outsourcing transaction, business leaders often cannot estimate total costs correctly,

thereby leading to flawed business decisions.

Transaction cost estimation errors. Transaction cost estimation errors derive

from business leaders’ inability to measure or quantify complex and dynamic outsourcing

transactions (Larsen et al., 2013). Hrušecká, Macurová, Jurickova, and Kozakova (2015)

stated that some business leaders could not effectively measure the strategic and

economic value of outsourcing transactions or accurately calculate total costs correctly

due to the complexities surrounding outsourcing decisions. In addition, Larsen et al.

(2013) argued that complexity and bounded rationality were drivers of transaction cost

estimation errors during strategic decision-making. Outsourcing is complicated; thus, one

can face difficulties when determining all the associated benefits, especially with

outsourcing IT processes.

In ITO, business leaders must evaluate total cost savings, including the IT cost

saving, in addition to the efficiency gains within other areas of the business (Han &

Mithas, 2013). Han and Mithas (2013) conducted a quantitative study of 300 U.S.

companies focusing on the period from 1999 to 2003. Han and Mithas determined that

managers must evaluate total cost, rather than IT cost, to determine business profitability.

The study results showed that managers often limited their focus to only reducing IT

costs, rather than evaluating the comprehensive efficiency gains achieved through

technological enhancements across their organizations. These gains included improving

operational efficiencies in sales, marketing, R&D, and general administration, which

could yield four to five times the cost savings compared with IT savings.

Dwivedi et al. (2015) reported that executive leaders struggled with how to

measure the value of IT outsourcing business outcomes, in particular with the later

generation of information systems, the Internet, and social media. Additionally, Han and

Mithas (2013) stated that organizations that outsourced IT processes, while also investing

in internal IT resources, especially training, experienced a greater reduction in non-IT

operating costs .This reduction primarily occurred due to the efficiency and productivity

gains that allowed one to focus on core and more value-added activities. Similarly, the

authors discovered that internal IT personnel were a critical component of managing

vendor relationships and ensuring compliance with designated contractual terms and

conditions, as well as SLAs.

Given the behavioral assumptions of the TCE theory (i.e., bounded rationality and

information asymmetry) that exist within all outsourcing transactions, business leaders do

not have the ability to identify all costs associated with outsourcing. Larsen et al. (2013)

defined hidden costs as unanticipated implementation costs related to governance

oversight, travel, and other coordination expenses not accounted for in the terms and

conditions of the outsourcing contract. These hidden costs can result in a discrepancy

between expected and realized total costs that affects the organization’s performance and

profitability. Caruth, Haden, and Caruth (2013) reinforced the importance of evaluating

the pros and cons of outsourcing HR activities, including the total cost impact and

potential hidden costs. Business leaders could lack the capacity to forecast the hidden

costs of outsourcing. Therefore, they could use flawed information when making

outsourcing decisions. Managers should expect and account for unknown costs, given the

complexity and uncertainty of outsourcing.

In general, one faces difficulties when estimating total outsourcing costs, but ITO

compounds the issue, given the technical and complex nature of IT (Kivijärvi &

Toikkanen, 2015). Larsen et al. (2013) performed a quantitative empirical study using a

diverse cross-section of client and service provider data from the Offshoring Research

Network. The researchers determined that high complexity, especially in IT configuration

and tasks, increased the probability of errors. Similarly, Larsen (2016) supported the

claim that business leaders could not understand the full implications of offshoring;

therefore, the leaders incorrectly estimate total costs, resulting in poor financial

performance. Larsen et al. (2013) also confirmed that complexity, partially derived from

bounded rationality and a lack of experience in offshoring, was a contributing factor to

cost estimation errors. Scholars have evaluated the determinants of estimation errors,

confirming various hypotheses, as well as reporting the following contrary findings

(Handley & Benton, 2013; Peeters, Dehon, & Garcia-Prieto, 2015).

Estimation errors vary based on project scope, the geographic distance between

client and vendor, and leadership engagement on the project. Handley and Benton (2013)

stated that outsourcing decisions were multifaceted in nature, and leaders often lacked the

analytical skills to forecast and estimate the total costs correctly. Additionally, Handley

and Benton argued that greater complexity required extensive coordination, which might

translate into higher outsourcing costs. On the contrary, Peeters et al. (2015) conducted a

quantitative empirical study using a data set of 624 global services to determine the

effects of cultural differences on offshoring decision-making. The researchers found that

cultural difference was an attention stimulus that business leaders could use to pay closer

attention to the details (i.e., whereby reducing bounded rationality) in the cost estimation

process. The process would result in more accurate cost estimates, thereby reducing

hidden costs and leading to realized cost savings. The project scope and the distance

between the parties significantly correlated, and intense focus on deficiencies, such as

cultural differences, enabled calculating a more accurate total outsourcing costs. Leaders

must consider ways in which these related determinants, such as project scope,

geographic distance, and engagement, affected costs, as well as minimized estimation

errors.

Business leaders with prior experience in offshoring or outsourcing, in addition to

the ability to convert complex data into meaningful information, may reduce estimation

errors. Bertrand and Mol (2013) conducted a quantitative correlation analysis between the

effects of innovation and domestic and offshore outsourcing by R&D organizations in

France between 1995 and 2004. Their findings indicated that cognitive distance (i.e.,

offshore outsourcing), rather than domestic outsourcing, had a positive effect on

innovative solutions when offshoring R&D activities.

Denning (2013b) conducted a case study on the Boeing 787 Dreamliner aircraft.

Denning (2013b) maintained that management could have prevented associated

outsourcing failure if they had executed the following actions: (a) performed sufficient

planning surrounding total costs to identify potential coordination costs, (b) identified the

applicable outsourcing risks and associated mitigation plans, and (c) strategized

execution and implementation. Denning (2013b) declared that leaders must have a clear

understanding of the product design and the specific components suitable for outsourcing

or offshoring before making decisions.

Additionally, Bertrand and Mol (2013) found that internal R&D resources with a

high degree of absorptive capacity could offshore efficiently. They confirmed a direct

correlation with absorptive capacity and the ability to accurately estimate total offshore

outsourcing costs. Bertrand and Mol demonstrated that business leaders with a high

degree of absorptive capacity and prior outsourcing or offshoring experience incurred

minimal estimation errors. Business leaders must identify, assess, and mitigate all

significant outsourcing related risks to achieve favorable business outcomes. Weighing

the cost-benefit options before execution is crucial in effectively managing the

outsourcing process.

Risks. There are risks and rewards associated with all business transactions

including outsourcing. Ikediashi, Ogunlana, and Udo (2013) defined outsourcing risk as

the probability of an adverse event negatively influencing the outsourcing outcome.

Outsourcing risk comprises financial, contractual, technical knowledge, political,

regulatory, technology, information security, and cultural and organizational risk (Shemi

et al., 2015). Therefore, one integrating outsourcing into an enterprise risk management

program is essential to managing outsourced processes effectively (Gewald & Schäfer,

2017). Business leaders must identify all the relevant risks associated with the

outsourcing decision, then carefully plan and execute mitigation activities to reduce the

risk exposure to acceptable tolerance levels.

Hepeng (2014) determined that the outsourcing client must first identify and

evaluate risks and establish appropriate mitigation plans before executing an outsourcing

contract. He stated that adequate planning and due diligence surrounding the outsourcing

decision would add economic and strategic value to the organization. Similarly, Vining

and Globerman (1999) reaffirmed the importance of identifying risks and appropriate

mitigation plans during the pre-outsourcing stage. Implementing effective risk

management strategies is critical in successfully managing outsourcing. Financial risk is a

significant outsourcing risk for organizations.

Financial risk. Financial risk is the risk of loss due to higher than expected total

costs for an outsourcing project (Ray, Tao, Olkhovets, & Subramanian, 2013). Large,

sophisticated service providers manage and deliver IT services through long-term

strategic outsourcing arrangements that are complex and difficult to manage, presenting

various risks, such as contractual and financial risks (Ray et al., 2013). Ray et al. (2013)

developed a risk and decision analysis framework to identify patterns of performance, the

drivers of financial risk, the appropriate risk response (i.e., accept, mitigate, and transfer

the risk), and the predictive modeling necessary to anticipate emerging trends. Their

study results indicated that the complexity of outsourcing presented significant exposures

to financial risk that business leaders could manage through their framework. Financial

risk could lead to significant losses, in addition to contractual risk.

Contractual risk. Contractual risk refers to the risk of loss due to inadequate

terms and conditions (e.g., the right to audit clause, SLAs, and recourse actions) within

the outsourcing contract or breach of the contract agreement (Wiengarten et al., 2013).

Wiengarten et al. (2013) argued that a comprehensive and complete contract, along with

effective vendor governance, would mitigate high transaction costs relating to

outsourcing, but a thorough contract was insufficient for mitigating quality concerns.

Conversely, outsourcing clients implement certain risk mitigation strategies, which pose

challenges for service providers, such as short-term contracts and splitting outsourcing

projects among several vendors (i.e., multivendor strategy). For example, splitting a

contract among several vendors can create issues related to coordination and lack of clear

ownership.

Alexandrova (2015) confirmed that the most common risk for ITO was

noncompliance with contractual obligations, in addition to cultural mismatches, thereby

leading to ineffective communication, insufficient security warranties, and lack of

knowledge transfer. Business leaders must implement effective risk management

strategies to mitigate contractual risk and ensure that vendors deliver on the terms and

conditions of contracts. Another key risk business leaders must manage in outsourcing is

technical knowledge risk.

Technical knowledge risk. Technical knowledge risk refers to the risk in

transferring key IT knowledge to the vendor, therefore resulting in inadequate IT

knowledge maintained in-house (Madsen, Bødker, & Tøth, 2015). Denning (2013a)

stated that the loss of intellectual property in outsourcing might increase innovation and

technical knowledge risk. Knowledge sharing is challenging in IT and systems

development due to the technical and complex nature of the field, which is exacerbated in

offshore outsourcing given the cultural diversity aspects (Persson, 2013). Persson (2013)

found that shared offices, shared responsibilities, and shared prioritization of internal and

offshore system developers minimized the exposure to knowledge transfer and cultural

diversity risks.

Teo and Bhattacherjee (2014) developed a nomological network that evaluated

antecedents (i.e., client motivation, vendor willingness, and prior experience with the

vendor) and outcomes (i.e., operational and strategic performance) of knowledge transfer

and utilization in IT relationships. The authors also conducted an empirical quantitative

study by surveying 146 IT outsourcing partnerships in Singapore. Teo and Bhattacherjee

found that the characteristics of outsourcing clients, vendors, and knowledge transferred

played important roles in facilitating knowledge transfer. The transferred knowledge, in

conjunction with the knowledge integration mechanisms, affected knowledge utilization

in client firms, which generated significant operational and strategic performance gains in

IT operations. Knowledge sharing is difficult in technical processes, and deliberate

sharing of information can mitigate knowledge loss with the outsourcing client (Teo &

Bhattacherjee, 2014). Several scholars have explored the factors affecting effective

knowledge sharing (Blomqvist, Peterson, & Dhar-Bhattacharjee, 2015; Madsen et al.,

2015).

Numerous factors influence effective knowledge sharing between client and

vendor. Madsen et al. (2015) noted three primary factors that affected knowledge

transfer: (a) the various types and uses for different knowledge, (b) cultural diversity, and

systematic approach to addressing knowledge transfer, which included (a) identifying and

prioritizing knowledge gaps, (b) selecting the appropriate mode for the knowledge

transfer, (c) designing a knowledge transfer plan, (d) executing the plan, and (e)

evaluating the effectiveness of the transfer.

To a certain extent, the effectiveness of knowledge transfer between client and

offshore vendor is determined by the success of the overall offshoring engagement

(Blomqvist et al., 2015). Blomqvist et al. (2015) identified numerous barriers to

facilitating IT knowledge transfer that managers could mitigate by identifying the issue,

devising a plan, and executing the plan. Business leaders must effectively implement

knowledge transfer to manage ITO successfully, along with identifying external risks,

such as political and regulatory risks.

Political and regulatory risks. Political and regulatory risks are the risk of loss

imposed by public opinion or noncompliance with regulatory laws, thereby resulting in

reputation management costs, fines, penalties, and other legal costs (Hirschheim, Heinzl,

& Dibbern, 2013; Schwörer, 2013). Schwörer (2013) reported that offshore outsourcing

was a political issue. The public perceives that the American workforce suffers from

layoffs, wage reductions, and fewer domestic opportunities due to offshore activities.

Hirschheim et al. (2013) argued that outsourcing arrangements presented

organizational, regulatory, and legal ramifications that leaders must tightly control and

monitor to yield desired outcomes. Effective strategies for mitigating political and

regulatory risks are important for achieving desired outsourcing outcomes. External

factors impose challenges to managing outsourcing, and technology solutions pose

unique risks to organizations.

Technology and information security risks. Technology and information security

risks refer to the risk of loss due to system failures or loss of data derived from malicious

internal or external attacks (Koku, 2015). Information security and quality concerns are

major factors for business leaders to consider when rejecting the notion of offshoring IT

services (Jain & Khurana, 2013). Contrary to reports by mainstream U.S. press, Koku

(2015) found that consumers did not have a negative perception of the offshore

outsourcing of medical and legal services but were concerned about data privacy and

information security issues related to accounting, tax, and financial services conducted

overseas. In addition, Ojha (2014) reported that Canadian firms would not increase

offshoring operations in India in the near future due to challenges, such as the risk-averse

nature of the Canadian population, data protection concerns, and Canadians’ poor

perception of India.

Trang (2017) reported that 86% of data breaches that occurred in 2015 improperly

exposed customers’ personal information (i.e., credit card accounts, bank accounts, social

security numbers, and health information). Additionally, cyber breaches might account

for over $400 billion in losses annually. Trang added that managers in the financial sector

have increased cybersecurity but still increased their vulnerabilities when they conducted

business with third-party vendors that had ineffective cybersecurity infrastructures.

Gonzalez et al. (2013b) stated that the main risks that leaders in the financial

services industry faced included breach of client personal and confidential data and the

high degree of regulations in the industry. Data privacy breaches and the lack of trust in

certain third-party vendors were concerns to business leaders. However, technological

advances that enabled cloud computing have heightened awareness of information

security risk.

Cloud computing offers many benefits but requires sufficient risk management

strategies. L. Zhang and Gu (2013) argued that the primary risk with cloud computing

was the lack of governance surrounding securing data, which placed organizations at

significant risk. Weng and Hung (2014) found that some business leaders engaged in

cloud technology and had not implemented the appropriate risk mitigation strategies to

secure and protect operations, intellectual property, customer information, and other

confidential data. Lack of security around sensitive data could expose these leaders to

significant losses and reputational harm, especially in highly regulated business

environments, such as the insurance industry. Cloud computing presents various risks

that management should effectively mitigate. Offshore vendors have typically

administered cloud computing services by compounding the risk exposure with cultural

and organizational elements.

Cultural and organizational risks. Cultural and organizational risks are risks of

loss due to mismatches between clients’ and vendors’ organizational values and

principles, as well as overall corporate and local cultures (Sartor & Beamish, 2014).

Persson and Schlichter (2015) asserted that offshoring posed unique risks that, if not

mitigated appropriately, increased the likelihood of offshoring failure. Sartor and

Beamish (2014) suggested that leaders who offshored faced increased challenges,

considering the influence of informal institutions (e.g., human behavior, norms, and

culture) on offshoring. The authors affirmed that offshoring added unique risk

considerations, such as cultural differences that management should tightly control and

govern. Researchers have evaluated the implications of cultural differences when

outsourcing or offshoring (Denning, 2013b; Parmer, 2015).

Business leaders who engage in offshoring must conduct cost-benefit analyses

before entering such transactions. Denning (2013b) posited that the primary risks

encountered by Boeing when offshoring certain components were related to cultural,

language, and distance barriers. Cultural differences and language barriers complicate

offshore outsourcing transactions; if leaders do not mitigate these appropriately, these can

lead to financial losses (Parmer, 2015). The reward must outweigh the additional risks for

participating in offshore outsourcing activities, such as one accessing new international

markets, acquiring new capabilities and innovation, and significantly reducing costs.

Offshoring increases the likelihood of failure, and thus requires sound risk management

strategies to manage the process successfully. In addition to executing effective risk

management strategies, business leaders must also identify different strategies throughout

the end-to-end outsourcing process to achieve favorable results.

Business Strategies for Managing the Outsourcing Process

Business leaders use different outsourcing strategies to gain strategic, operational,

and economic benefits. Patil and Patil (2014) reported that one must align outsourcing

decisions to a business strategy because of outsourcing’s impact on business objectives

and priorities, roles and responsibilities, and employee morale. Similarly, Brewer,

Ashenbaum, and Ogden (2013b) argued that intense focus on a particular outsourcing

strategy had a positive relationship with achieving the associated business objective. In

particular, the authors stated that intense focus on a specific strategy, such as reducing

costs, would achieve greater cost reductions compared to less intense strategies.

Concentrating on specific strategies and aligning outsourcing goals with business

objectives are important elements for effective outsourcing management to deliver

desired business results. Although focusing on a particular outsourcing strategy may

achieve positive results, Nordigården et al. (2014) discovered that combining outsourcing

strategies might deliver better results.

Brewer et al. (2013a) maintained that a single-strategic approach achieved lower

performance compared to balanced approaches, and Nordigården et al. (2014) posited

that business leaders must incorporate combined strategies to govern the make-or-buy

decision appropriately. Specifically, the dominant in-house strategy enables capacity

optimization during production. Business leaders can outsource less cost-effective

activities, while they use the dominant outsourcing strategy to mitigate lock-in risk (e.g.,

using a single vendor, leading to high switching cost). Consequently, combining

dominant in-house and outsourcing strategies better mitigates the various risks, such as

loss of technical knowledge and underutilization of resources. Leaders can use suitable

outsourcing strategies to mitigate associated risks, thereby assisting leaders in managing

the outsourcing process to improve the performance of the organization.

MacKerron et al. (2015) completed a case study on a United Kingdom financial

services institution to evaluate if effective performance management strategies

contributed to the success of managing an IT outsourcing project. Some key performance

indicators (KPIs) included number of customer complaints, total cost incurred, and total

revenue generated, along with SLAs and analysis of vendor performance. MacKerron et

al. concluded that effective performance management strategies would generate favorable

outsourcing results, assuming leaders had effective risk management strategies in place

for the various outsourcing risks.

Sohel and Quader (2017) conducted a qualitative case study on the IT operations

of the British Standards Institute. The research study results indicated that effective

outsourcing strategies were highly crucial to the success of the organization operating in

a highly volatile and competitive business environment. Additionally, the researchers

argued that outsourcing provided management the opportunity to leverage their IT

resources to focus on core competencies. Isaksson and Lantz (2015) confirmed no

significant relationship between various outsourcing strategies and financial performance.

Di Tullio and Bahli (2013) stated that many business leaders have adopted the

capability maturity model originally developed by the Software Engineering Institute.

The authors also asserted that the construct assisted management with incremental

improvements in software performance over time. Their findings showed a direct

correlation between software performance and software process maturity.

Prawesh et al. (2016) performed a quantitative empirical study using a large

dataset of 112 IT system integration outsourcing projects of publicly traded companies

during 1995 to 2010 to determine if the position title of project owner (i.e., the leader of

IT information security projects) influenced firm performance (i.e., cost savings, revenue,

and profitability). The authors found that when IT executives led the IT projects, they

could reduce the overall organizational costs, but when non-IT executives led similar IT

projects, the profits significantly increased. The results of the study indicated that

differences in leadership styles could have a significant influence on leaders’ business

metrics. Effective performance management strategies, as well as different leadership

styles and maturity life cycles, could influence outsourcing outcomes. Researchers not

only explored variables influencing performance but also reviewed similarities between

outsourcing and lean management principles.

The core objective of lean management and outsourcing is to eliminate

inefficiencies and create value. Guimarães and de Carvalho (2013) analyzed existing

literature on outsourcing strategies in health care supply chain management to determine

the alignment with lean management philosophy, such as continuous improvement, value

creation, elimination of waste, and a focus on quality. Guimarães and de Carvalho

confirmed that outsourcing strategies aligned closely to lean management techniques

because the primary drivers for outsourcing decisions involved creating value and

improving performance.

Similarly, Osadchyy and Webber (2016) added that as managers overcame

obstacles and realized the traditional benefits of various outsourcing strategies,

continuous improvement materialized in the form of quality, efficiency, and value. The

authors concluded a clear correlation existed between the objectives of lean management

and outsourcing. Researchers have affirmed that outsourcing noncore activities creates

value, as well as empowers leaders to redeploy resources to perform core competencies.

Staggered strategic approach to outsourcing. Business leaders outsource

noncore business activities to focus on more strategic and profitable activities that will

grow and expand their businesses. A common outsourcing strategy is to maintain core

competencies in-house, while outsourcing noncore business activities, such as customer

service, IT, food service, and janitorial service to third-party providers (Wu, Cegielski,

Hazen, & Hall, 2013). Letica (2014) noted that outsourcing noncore activities enabled

managers to focus on core capabilities to deliver higher value for enterprises. Many

researchers have performed similar studies on outsourcing noncore business activities to

determine the value implications (Caruth et al., 2013; Sani, Dezdar, & Ainin, 2013).

Sani et al. (2013) conducted an empirical quantitative study with hotel decision-

makers in Malaysia and discovered that hotel managers tended to outsource noncore

functions, such as laundry and housekeeping services, to third-party vendors. The

primary drivers involved gaining additional capabilities through supplier expertise and

leveraging well-known brand names, as well as increasing internal efficiency.

Additionally, Sani et al. posited that hotel decision-makers chose reliable and reputable

vendors to outsource their noncore functions, thereby minimizing cost and risks.

Caruth et al. (2013) developed a useful hierarchy of HR activities that were

potentially conducive to outsourcing in ascending order of critical nature and likely

potential for outsourcing. The authors concluded that noncore activities, such as food and

janitorial services, were more likely to benefit from being outsourced than were core

business activities, such as succession planning and performance management. Many

scholars have observed that as leaders gain experience with outsourcing activities, a

cascading effect occurs with outsourcing other activities (Fogarty & Bell, 2014; Ruth,

Brush, & Ryu, 2015).

Leaders tend to expand their outsourcing operations after they acquire knowledge

of how to manage the process successfully. Fogarty and Bell (2014) observed that

outsourcing had a cascading effect, whereby organization leaders began with outsourcing

noncore activities, such as customer service and telesales. Leaders eventually outsourced

sophisticated services, including computer programming and legal research to improve

overall firm performance and sustain competitiveness.

Ruth et al. (2015) conducted a quantitative empirical study of 243 Fortune 1000

companies that outsourced a minimum of one benefit and compensation activity to

determine the influence of technology solutions on outsourcing other HR services. Their

findings showed a direct correlation between HR technology enhancements through

outsourcing and the outsourcing of additional HR services. Ruth et al. argued that

technology solutions enhanced process standardization, thereby influencing the

centralization of economies of scale and enabling additional outsourcing activities.

Therefore, as business leaders gain experience with outsourcing noncore activities and

determine key lessons learned, they generally expand their outsourcing to include core or

strategic activities. Many researchers have also explored the competing priorities of

various stakeholders to balance financial performance, in addition to executing operations

in a socially responsible manner (S. Li et al., 2014).

Business leaders must operate their enterprises sustainably to meet the

expectations of their demanding shareholders, as well as other key stakeholders, such as

nongovernmental organizations, regulators, financial analysts, customers, and other

interest groups to maintain companies’ reputations (S. Li et al., 2014). S. Li et al. (2014)

identified the key drivers for sustainability efforts as (a) regulatory demands, (b) supply

chain pressures, (c) company reputation, and (d) marketplace requirements. S. Li et al.

also recommended the following outsourcing strategies designed to progress toward a

more sustainable business model: (a) evaluating internal and external practices such as

redesigning products to incorporate sustainable practices, (b) implementing effective risk

management strategies to address sustainability concerns, and (c) establishing external

vendor cooperation.

Hamed MoosaviRad et al. (2014) added that the government played a vital role in

enforcing sustainable business practices. Operating a sustainable organization is a good

business model to increase brand equity, as well as a triple bottom line over the long

term. Business leaders who embrace and execute sustainable outsourcing strategies, such

as selecting a suitable third-party outsourcing vendor, may achieve favorable outcomes.

Vendor management strategies. One of the crucial steps in outsourcing involves

one selecting an appropriate vendor. Nduwimfura and Zheng (2015) argued that supplier

selection was one of the most critical decisions in outsourcing and could lead to the

success or failure of an outsourcing initiative. Kim, Lee, Koo, and Nam (2013) stated that

effective contract and vendor management significantly influenced organizational

performance, including cost efficiency, performance improvement, and overall

satisfaction. Caruth et al. (2013) created a framework for outsourcing HR activities that

comprised the following three steps: (a) determine which activities to outsource; (b)

weigh the pros and cons of outsourcing such activities (e.g., cost, quality, economies of

scale, loss of in-house knowledge, and expertise); and (c) build a sound vendor

relationship grounded in trust, commitment, shared values, and high integrity. Selecting

an appropriate vendor with a good cultural fit and shared values is essential to building a

healthy, collaborative, and long-term successful vendor relationship. Nduwimfura and

Zheng (2015) and Watjatrakul (2014) explored different vendor selection tools to

understand effective methods for selecting vendors.

Business leaders must consider multiple variables when selecting vendors for

outsourcing; thus, establishing an appropriate vetting process for selecting a vendor is

imperative. Nduwimfura and Zheng (2015) proposed a model based on a methodology,

known as preference ranking organization method for enrichment evaluation, to identify

appropriate offshore service providers at the country level. The authors contended that

the model would assist business leaders in assessing various preference functions and

weights to select appropriate vendors. Watjatrakul (2014) performed quantitative research

conducting 1,000 experimental tests to evaluate two weighted vendor selection

techniques and analyze the selection results. By adjusting the weights for qualification or

the vendor evaluation criteria and price, the author indicated that the proportions of

qualification influenced the results of vendor selection under the two methods.

Watjatrakul observed that the method, as well as the criteria and weights used in

identifying the right vendors, might influence the results. Hence, sufficient due diligence

in methodology and assessment are critical in selecting the right vendor. Many

researchers have observed that business leaders also implement multivendor strategy

primarily to mitigate various outsourcing risks (Mackenzie & DeCusatis, 2013; F. Su et

al., 2014).

Business leaders who employ the multivendor strategy are minimizing risk

exposure associated with single-source dependence that results in high transaction and

switching costs (F. Su et al., 2014). F. Su et al. (2014) recommended that outsourcing

clients mitigated their dependence on a particular strategic business partner with a

multivendor strategy, in addition to maintaining some operations in-house. Business

leaders are trending toward outsourcing smaller projects using multiple vendors has

increased the level of complexity in outsourcing arrangements resulting in a major

challenge in devising an effective and efficient governance infrastructure to facilitate the

process (Gewald & Schäfer, 2017). Mackenzie and DeCusatis (2013) performed

longitudinal case studies on sustaining innovation when outsourcing multiple technical

system components and found that multivendor outsourcing promoted innovation.

Specifically, the authors demonstrated that one achieved innovation through competitive

variety, mitigating the risk of components becoming obsolete, and reducing costs through

bargaining power related to supply fragmentation. Similarly, Patil and Wongsurawat

(2015) asserted that implementing appropriate outsourcing strategies, such as using

multiple vendors and short-term contracts, might increase transaction costs but would

also empower outsourcing clients to (a) effectively mitigate vendor opportunism, (b)

promote competition among third-party providers, and (c) lower switching costs. Thus,

leaders need to achieve the correct balance between cost, risk, and strategy to manage

outsourcing successfully. A multivendor strategy mitigates various outsourcing risks for

the client, but the quality of the relationship plays a key role in effective outsourcing.

The quality of the business partnership and service level contributes to the success

of outsourcing. Seshadri (2013) claimed that establishing positive client-vendor

relationships during the early stages of outsourcing was key to a successful outcome.

Plugge, Bouwman, and Molina-Castillo (2013) discovered that service providers, who

ensured a good cultural fit between their business capabilities and customer needs,

typically had a lower risk of failure with outsourcing. Sukru Cetinkaya, Ergul, and Uysal

(2014) posited that the client-vendor relationship and the service quality of the

outsourcing initiative determine the degree of outsourcing success. Sukru Cetinkaya et al.

added that attributes, such as trust, commitment, culture, interdependence, and

communication, revealed the quality of the client-vendor relationship. Moreover,

elements, such as hardware and software maintenance, reliability, responsiveness, and

quality assurance, measured service quality. Marchewka and Oruganti (2013) maintained

that the quality of the outsourcing business relationship, as well as of the process and

cultural implications, significantly influenced outsourcing success. The authors further

concluded that having a strong rapport with vendors was a contributor to successful

outsourcing results.

The effectiveness of the business partnership and leaders’ levels of engagement in

the outsourcing decision are crucial to outsourcing success. Denning (2013b) stated that

the success factors for an outsourcing strategy implemented within a major car

manufacturer included (a) maintaining in-house ownership of the product design and

engineering; (b) selecting quality suppliers with proven track records of timely delivery,

quality service, low cost, and innovative performance; and (c) sustaining long-term

strategic relationships built on trust and integrity. Patil and Patil (2014) noted that

depending on the degree of management engagement at all levels, outsourcing could

either positively or negatively influence profitability. Specifically, high management

engagement in developing sound contract terms and conditions, including SLAs and

KPIs, as well as strong strategic partnerships with a good cultural fit, has positive impacts

on firm leaders’ bottom lines. Alternatively, the lack of due diligence in the precontract

phase of outsourcing and poor vendor oversight would have negative consequences.

These researchers reiterated a common thread throughout the literature regarding

successful outsourcing strategies, and scholars who evaluated legal and IT processes

affirmed similar success qualities (Yu & Shiu, 2014).

The quality of the business relationship, in addition to information asymmetry

between the parties, influences overall performance. Yu and Shiu (2014) performed a

mixed-method study with partnerships between life insurers and their intermediaries

located in Taiwan. They observed that partnership attributes (e.g., commitment,

coordination, and trust), communication variables (e.g., quality, information exchange,

and participation), conflict resolution approaches (e.g., problem solving and persuasion),

and market orientation (e.g., products, premium, and distribution) directly influenced

partnership performance (e.g., satisfaction and first-year premium income). Bruna et al.

(2014) asserted that the outsourcing partnership involved power dynamics. These were

closely tied to trust and control, given the degree of information asymmetry between

parties. Business leaders must build a strong rapport with their vendors to generate

favorable results. However, they should also consider different outsourcing strategies,

depending on the geographic distance between themselves and their vendors.

Business leaders may require different strategies, depending on the distance

between the client and vendor operations. Leaders focus on different business objectives

when outsourcing to domestic versus offshore partners (Größler, Laugen, Arkader, &

Fleury, 2013). Specifically, managers typically focus on flexibility when collaborating

with local partners but on lowering total cost when offshoring. Scandinavian companies

are inclined to outsource with nearshore vendors (i.e., outside the boundaries of the home

country, but typically within the same region). The leaders will outsource when the

project requires complex and flexible deliverables with service, as opposed to production

activities, in order to meet compliance and regulatory standards (Slepniov et al., 2013).

Thus, business leaders execute different strategies, depending on vendors’ capabilities

and locations. When leaders use ITO strategies, it may add another layer of complexity

given the technical nature of the function.

ITO strategies. Business leaders outsource noncore activities, such as IT

processes and intangible resources. Information software development remains the most

common form of ITO, followed by website management, e-commerce, disaster recovery

services, and software as a service (Nuwangi et al., 2014). Tarn (2015) stated that

executive leaders did not offshore and outsource solely tangible resources, such as

products and IT software, but they acquired intangible resources, such as goodwill,

technical knowledge, and consultancy services. Business leaders tend to outsource or

offshore their IT processes because these are generally not core competencies. As

business leaders gain offshoring experience, they transfer activities that are more

sophisticated to third-party service providers.

Business leaders tend to first outsource basic IT processes, and then they

eventually outsource strategic and sophisticated processes. Brcar and Bukovec (2013)

conducted a quantitative study and concluded that business leaders have shifted their

offshore outsourcing strategy from simple IT tasks (i.e., help desks and software

maintenance) to more sophisticated tasks (i.e., IT software development) to devote

greater attention to strategic versus economic benefits. Temkar (2015) argued that the

competitive business environment and technological advances, such as mobile data, cloud

computing, social media, robotic automation, the Internet, and email, have all contributed

to the rise in ITO in the clinical trial industry. Temkar also noted that by collaborating

with the right vendors, business leaders in this industry could streamline their processes

and improve the speed of drug delivery to the marketplace at lower costs without

compromising product quality and safety.

Business leaders who outsource IT processes are often motivated to produce

innovative services to yield positive outsourcing outcomes. N. Su, Levina, and Ross

(2016) posited that business leaders have incorporated the long-tail strategy (i.e.,

outsourcing to a few smaller, highly innovative companies with short-term contracts)

when outsourcing IT processes to drive innovation that would improve cost and

performance. Business leaders expect innovative solutions (e.g., innovation in products,

process and business models) from their strategic business partners to gain a competitive

advantage in the marketplace (Das, 2017; Reeshma & Rajkumar, 2017). Additionally, a

strategic partner’s knowledge of their clients’ business model and operations significantly

influences their abilities to identify and implement innovative solutions to drive favorable

results (Bryan Jean, Sinkovics, & Kim, 2017).

Lacity and Willcocks (2014) performed an empirical mixed-method study on

driving dynamic innovation when outsourcing IT processes. They discovered that setting

mandatory productivity targets, allocating time for identifying innovative ideas, and

sharing the financial gains at the project level were effective incentives for creating

innovative cultures. Lacity and Willcocks (2014) argued that innovation seldom

manifested with a dramatic, one-time significant change, but rather emerged

incrementally over long periods. Leaders have also determined innovation based on staff

experiences and skills.

Certain business environments are conducive to innovation. Alderete (2013)

asserted a direct relationship existed between SMEs’ outsourcing activities and the level

of innovation, as well as access to information and communication technologies.

Presbitero, Roxas, and Chadee (2017) conducted an empirical quantitative study with

results that indicated knowledge sharing capability positively correlated to innovation.

Moreover, the researchers discovered that organizational collectivism (e.g., groupthink;

individuals aligning to norms, traditions, or behaviors) was significantly and positively

moderating for the effects of knowledge sharing on both organizational learning and

innovation. Additionally, Wickramasinghe (2015) reported that knowledge sharing and

availability were significant predictors of innovativeness when offshore outsourcing of IT

software development occurred; internal and external factors affected the levels of

innovation in outsourcing, and cloud computing was an innovative ITO solution.

Business leaders have employed cloud computing with third-party vendors to

reduce cost when outsourcing IT processes. L. Zhang and Gu (2013) stated that business

leaders should engage in cloud computing to reduce costs and capital expenditures,

improve quality and performance, better adapt to changes in the business environment,

transfer data quickly, and strengthen the control environment. There was no clear

definition of cloud computing. However, Wu et al. (2013) defined it as virtualized IT

resources that were available in various forms, such as software, infrastructure, and

dynamically scalable and configurable platforms. In general, cloud computing refers to

applications and servers stored and accessed through the Internet (Wu et al., 2013).

Organization leaders can use cloud computing to encourage innovation through

creativity, flexibility, and efficiency at reduced costs because no hardware or software is

needed. Moreover, a hosting company or vendor manages the entire infrastructure (Wu et

al., 2013). In addition to using innovative solutions to meet outsourcing objectives, Wu et

al. (2013) found that sound vetting, including of people and processes, might produce

positive results.

Business leaders with sound outsourcing controls, as well as effective sourcing

departments, tend to add value in outsourcing. Huber et al. (2014) reported that leaders

identifying and formalizing key controls in the outsourcing end-to-end process were

instrumental in leading successful outsourcing projects. However, these authors also

maintained that the sufficiency and adequacy of such controls were challenging due to

the complexity and uncertainty of outsourcing. Eltantawy, Giunipero, and Handfield

(2014) asserted that the effectiveness of the sourcing or procurement department had

direct positive correlations with reputation, vendor management, and overall outsourcing

performance. Sound governance infrastructure was instrumental in facilitating

outsourcing. Many scholars have researched backsourcing, which is the opposite of

outsourcing, to determine drivers and results.

Business leaders must devise exit strategies when outsourcing services to

minimize financial loss. Backsourcing or reshoring may have positive results when

business leaders outsource or offshore IT architecture and infrastructure within well-

developed vendor markets when substitutions are readily available (Nagpal, 2015).

Denning (2013a) recommended that business leaders should continuously monitor the

outsourcing process to determine whether backsourcing specific products, components,

or services would be prudent and conducive to greater profitability. Calculating the right

timing for backsourcing might reduce financial loss or even increase profitability.

Business leaders use different strategies to manage the outsourcing process;

therefore, identifying the appropriate strategies is critical to leading a successful

outsourcing process, as well as for improving overall performance. Otherwise, scholars

have concluded that a lack of sound governance and poor vendor relationships could

result in negative outsourcing outcomes. Given the complexity and uncertainty of

outsourcing, many researchers have suggested that comprehensive and holistic strategic

approaches to managing outsourcing would achieve the best results (Brewer et al., 2013a;

Nordigården et al., 2014).

Transition and Summary

Section 1 was an introduction to the study, the problem statement, and the lack of

knowledge of managing outsourced IT processes. The section covered some key elements

of the study, including the problem statement, purpose statement, nature of the study,

research question, conceptual framework, significance of the study, and literature review.

The findings from this study revealed the strategies business leaders implemented to

manage outsourced IT processes effectively. The study also offered insights into best

practices to leverage for future outsourcing. The literature review provided an

understanding of the TCE theory, as well as supporting and rival theories.

In Section 2, I describe my qualitative research approach. The approach includes

the populations and sampling, data collection, data analysis, and reliability and validity.

In Section 3, I present the doctoral study findings. The findings include applications to

professional practice, implications for social change, and recommendations for future

studies.

Section 2: The Project

In this section, I provide pertinent information about my role as the researcher, the

purpose of the study, and my criteria for selecting prospective business professional

participants. Section 2 also includes an overview of, and rationale for, my research

method and design approach, along with a discussion of the key methodological and

design considerations for my research. I address my reasons for choosing a qualitative

method and a case study design to explore the strategies that business leaders use to

manage IT outsourcing. Moreover, I discuss my population and sampling approach, my

approach to ensuring ethical research, and the tools that I used during the data

organization, collection, and analysis. Additionally, I discuss my plan for ensuring the

reliability and validity of the study findings.