Organizational Control, Incentive Contracts, and Knowledge Transfer in Offshore Business Process Outsourcing

We study the determinants of output quality in offshore business process outsourcing (BPO). Firms can exert control over output quality through incentives formally written into contracts and allow both clients and providers to manage the offshore agents creating a dual governance mechanism. We use a combination of two data sets, a cross sectional data set of 139 processes and a balanced panel data set comprising 21 processes with 36 observations per process, to investigate the impact of different factors on the quality of output of offshore BPO providers. Our findings point to the strong moderating effect of process codifiability on the dual governance mechanism. Process codifiability is not only associated with higher output quality, it also moderates the functioning of the dual governance mechanism and determines when the managerial efforts of the client and provider are substitutes and when they are complementary. We show that contractual incentives tied to quality are generally associated with a higher quality of output. Finally, we show that the use of process-level inter-organizational information systems also has a positive impact on the output quality of offshore BPO providers.