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Outsourcing has emerged as a prevalent business practice that is having a transformational impact on how many organizations manage their global supply chains. Despite this prominence, anecdotal reports from multiple reputable organizations suggest that many businesses fail to realize the benefits anticipated from their outsourcing initiatives. Motivated by these observations, this study investigates those management practices during the outsourcing process that are key drivers of outsourcing performance. Specifically, detailed data from 198 sourcing executives and managers responsible for outsourcing initiatives are used to investigate the influence that strategic evaluation, contractual completeness, and relationship management practices have on achieving projected outsourcing results. The results offer strong empirical evidence that outsourcing performance is significantly influenced by extensive strategic evaluation and proactive relationship management practices. Moreover, the impact strategic evaluation has on outsourcing performance is not direct, but rather is partially mediated by the relationship between the parties. Finally, the results show that contractual completeness does not distinguish between successful and unsuccessful outsourcing efforts, and can be considered qualifying activity.

There is hardly a more salient question faced by industrial leaders than “which aspects of our value chain should we perform internal to our organization and which aspects should we source externally?” Some have addressed this question as the classic make-or-buy decision or the decision as to the extent of vertical integration. More recently, this demarcation of firm boundaries has been studied from the perspective of outsourcing. When considering outsourcing, firms are evaluating whether or not to reverse a prior decision to “make”. In other words, outsourcing involves the re-shaping of existing firm boundaries. Outsourcing can further be conceptualized as a process which begins with the development of a sound business case for outsourcing followed by the implementation of the external sourcing model, and ultimately the management of the relationship with the provider. Outsourcing has clearly emerged as a prevalent and transformational business practice. Given this popularity, the experiences being reported by many organizations are somewhat surprising. According to a Deloitte Consulting study (Landis et al., 2005), 64% of respondents indicated that they had brought outsourced services back in-house and 44% did not realize cost savings. Moreover, Dunn and Bradstreet found that 20–25% of all outsourcing relationships fail within 2 years and half fail within 5 years (Doig et al., 2001). A more recent and expansive Deloitte survey of 300 business executives also found the need for improved outsourcing practices. Only 34% were satisfied with the provider's innovation and 61% indicated that they had to “escalate” problems to senior management within the first year (Robinson et al., 2008). Further, 75% of service providers interviewed felt that their clients were ill prepared for the outsourcing initiative often lacking a well-developed strategy and clear understanding of how it would work. These anecdotal findings which suggest that there is a troubling gap between expectations and reality serve as the motivation for this research.

This study identifies salient elements of the business outsourcing process and made significant contributions to the academic literature. There are three main contributions of this study. First, an outsourcing model that is strongly grounded in theory was presented and tested. Secondly, a rigorous multi-stage methodology was used to refine and validate new scales for constructs pertaining to the strategic evaluation and contractual completeness of outsourcing initiatives. Finally, a thorough empirical methodology was utilized to establish unambiguous prescriptions for the management of outsourcing initiatives. These managerial recommendations include: • Outsourcing management teams must focus on the development of a cooperative and mutually committed relationship with the provider if they are to fully realize their performance expectations. • The positive influence of strategic evaluation on outsourcing performance is indirect rather than direct. The true value of a more extensive strategic evaluation lies in its direct influence on relationship management which in turn directly influences outsourcing performance. • While extensively sought, a more complete contract cannot be relied upon to guarantee improved outsourcing performance. Future studies concerning the drivers of outsourcing performance are warranted. The model evaluated in this study explained a substantive 25% of the variance in performance, yet also points to the need for understanding other elements of the outsourcing process that meaningfully impact performance. This evolving field offers many complexities that must be more fully understood. For instance, recent work by Aron et al. (2008) offers initial insights into how advances in information technology are allowing buying firms to gain more control over their offshore BPO providers which results in improved levels of process quality. Also, the current study did not find support for the hypothesis that contractual completeness influenced outsourcing performance. Future research could look at specific outsourcing environments where the contract plays a more or less significant role in determining performance outcomes. Alternatively, future empirical efforts could investigate whether a more complete contract when used in conjunction with other “enforcement” practices (e.g. monitoring, inspections, audits) would significantly influence performance outcomes. Additionally, there are often significant employee related issues that arise with outsourcing and complicate the implementation of the new sourcing arrangement. Future empirical studies could take a more focused look into these areas. For example, one could study a sample of outsourcing initiatives which result in layoffs or employee transfers. Finally, it is often said that outsourcing alters the risk profile of supply chains. This notion offers rich opportunities for exploration. Future studies could seek to develop detailed insights as to how organizations can balance the potential financial benefits of outsourcing with the inherent risks (financial and/or strategic) involved. These are just a few examples of potential studies in what is anticipated to be a blossoming research stream.