The Dark Side of Outsourcing: Task Scope, Vendor Relationships, and Value Creation in IT Services

Joydeep Chatterjee, University of Washington Bothell School of Business, and Saikat Chaudhuri, Management, The Wharton School

Abstract: As outsourcing expands in scope to increasingly higher-end tasks, the tension between value creation and appropriation in such inter-firm relationships raises important questions regarding the extent to which a firm should outsource activities in the value-chain and engage with its suppliers. Applying a knowledge-based and capabilities lens to the phenomenon, we theorize that the nature of the task being outsourced impacts the magnitude of market value creation from such inter-firm relationships. An event-study analysis of a sample of publicly announced IT/IT-enabled services outsourcing deals, based on the scope of work outsourced shows that greater sophistication of outsourced tasks lowers market value creation for the outsourcing firm. This negative effect is accentuated with longer client-vendor relationship thus underscoring the potential negative consequences of over-dependency on vendors.

Michelle Eckert is Marketing and Communications Coordinator for the Mack Institute, where she works to engage students, researchers, and corporate partners in opportunities for collaboration. Michelle received her B.A. in Art from Valparaiso University in 2007. Her background includes two AmeriCorps terms of service working to teach mathematics, computer literacy, and job readiness skills to out-of-school youth in Philadelphia, focusing particularly on promoting access to post-secondary education.