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

Joydeep Chatterjee, Rutgers Business School, and Saikat Chaudhuri, University of California at Berkeley

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.