The strategic choice of contract types in business process outsourcing
Business Process Management Journal
ISSN: 1463-7154
Article publication date: 24 May 2021
Issue publication date: 10 August 2021
Abstract
Purpose
How to determine the appropriate contractual structure for an outsourcing relationship has been a major theme in the business process outsourcing (BPO) literature. Drawing on transaction cost economics, this study aims to examine how anticipated coordination and adaptation costs in a BPO relationship affect the choice of contract types. Specifically, this research categorizes contracts types (fixed-price, time and materials and hybrid contracts) based on levels of contract design comprehensiveness and flexibility to change.
Design/methodology/approach
The research setting is the BPO for a focal firm, involving a contractor. Data from 153 US companies are collected using a structured questionnaire on senior executives of functional areas of marketing, IT and finance. Hypotheses were tested using ordered probit model.
Findings
The results show that maturity is negatively associated with anticipated adaptation costs, while modularity and IT detachability are negatively related to anticipated coordination costs. Furthermore, adaptation costs have a direct impact on the choice, whereas the anticipated coordination costs do not have a significant direct impact on contract choice. The strength of adaptation costs' impact, however, is significantly reduced when coordination costs are high.
Originality/value
This study explicitly examines the role of anticipated coordination and adaptation costs in shaping the strategic choice of contract types in the BPO market. By differentiating the two types of anticipated transaction costs, this research enables a better understanding of the dynamics between transaction characteristics, anticipated transaction costs and contract types in complicated relationships such as BPO relationships.
Keywords
Acknowledgements
The authors gratefully acknowledge a grant from National Natural Science Foundation of China (project 71672164) and City University of Hong Kong (CityU 11502218) for financial support.
The author also wants to extend enormous thanks to Dr. Prabhudev Konana and Huseyin Tanriverdi for their support.
Citation
Ge, L., Wang, X. and Yang, Z. (2021), "The strategic choice of contract types in business process outsourcing", Business Process Management Journal, Vol. 27 No. 5, pp. 1569-1589. https://doi.org/10.1108/BPMJ-11-2020-0493
Publisher
:Emerald Publishing Limited
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