Dependence, power imbalance, and value gains in business process outsourcing

Abstract We examine the impact of interdependencies in business process outsourcing (BPO) relationships on client and vendor firm values both in the short term and over a longer time horizon. Drawing from recent research incorporating the resource dependence theory, which appertains the interdependence to both mutual dependence and power imbalance in interfirm relationships, we posit the value proposition of BPO to be greater for mutually dependent engagements, and more so for the vendor than for the client. In addition, we posit the power imbalance in BPO relationships to be detrimental for clients and vendors, and thus, the value proposition of such BPO is expected to be lower for both. We empirically examine these issues through an event study of 285 publicly announced BPO engagements and find that mutually dependent BPO relationships, which were difficult to decouple, are value enhancing for both clients and vendors, and more so for vendors. In addition, although the power imbalances were expected to be detrimental to both, we find this power imbalance to negatively affect only the vendors but had a positive effect on clients.