A Model of Contingent Governance Choice and Performance in Business Process Outsourcing: The Effects of Relational and Process Uncertainty

Business process outsourcing (BPO) is rapidly emerging as an imperative for competitive success in modern organizations. This study characterizes contractual coordination, or the mutual exchange of rights, and procedural coordination, or the relational norms and processes that facilitate mutual exchange of information, as two fundamental elements of governance of BPO relationships, and posits that the choice of these elements is contingent on the type of uncertainty encountered in the BPO task environment. In particular, we focus on relational uncertainty (or uncertainty perceived by the user firm about its relationship with the service provider) and process uncertainty (or uncertainty in execution and management of the outsourced process across organizational boundaries). We draw on transaction cost economics and theories of inter-firm coordination to posit that the extent of contractual coordination in the BPO relationship is determined by relational uncertainty while the extent of procedural coordination is determined by process uncertainty. Further, while performance of the BPO relationship is explained by the complementary relationship between contractual and procedural coordination function, it is also significantly influenced by the alignment between contractual coordination and relational uncertainty and procedural coordination and process uncertainty. Our analysis of survey data on 137 active BPO relationships provides strong support for our hypotheses. The contingency approach to governance of BPO relationships helps reconcile the economic conceptualization of governance of outsourcing relationships as a nexus of contracts and the organizational perspective of governance as a complex work system by applying each perspective in a discriminating fashion based on the effects of relational and process uncertainty. An understanding of the contingent effects of uncertainty will help managers negotiate varying outsourcing task environments and effectively leverage BPO to improve firm competitiveness.