Of Governance and the BPO Paradox: The Impact of Information Capabilities on Service Satisfaction

The fundamental value premise of business process outsourcing (BPO) is a greater process efficiency at reduced costs of ownership. However, recent studies suggest that BPO may add cost and friction, and require more management attention than originally envisioned to realize the benefits of outsourcing. Service dissatisfaction ensues, giving rise to a BPO paradox. This study focuses on the role of governance choice in resolving this emerging paradox. We build on the information processing view of the firm and theories of interfirm coordination to argue that the alignment between information requirements (IR) of the BPO relationship and information capabilities (IC) of the governance solution is central to service satisfaction. We use this conceptual model of fit to identify two aligned configurations of BPO governance, which reflect the endpoints of a continuum in decreasing order of IR and IC. These configurations are used to test hypotheses predicting alternative governance choices and the impact of these choices on service satisfaction. Our empirical analysis of survey data on 137 BPO relationships suggests that aligned BPO configurations are marked by higher levels of satisfaction than nonaligned relationships and that underinvestment in IC has a marked negative impact on satisfaction relative to overinvestment. The findings enhance managerial understanding of governance choice in BPO and underscore the normative implications of the alignment between IR of the BPO relationship and IC of the governance solution on service satisfaction and the BPO paradox.