Efficiency and the scope of outsourced services: a client firm’s absorptive capacity perspective of knowledge-intensive services

Strategic literature has focused on how economies of scale in a firm offering outsourcing may generate incentives for clients to increase the outsourced services, but there has been limited research on how the clients’ features may influence the scope of services that they hire with an outsourcing provider. This study analyzes whether a client’s efficiency motivates it to increase ties with a specific provider of knowledge-intensive services in the context of business process outsourcing (BPO). We further explore whether industry conditions moderate the relationship.

A research framework is developed consisting of three main hypotheses. We combine industry data and proprietary and financial data from a longitudinal sample of 107 client firms of a multinational outsourcing service provider to test our hypotheses.

We find that more efficient firms hire more services from an outsourcing provider and that the munificence of the client firm’s industry positively moderates this relationship. Our results suggest that efficient clients can better keep transaction costs under control when accessing, assimilating, and exploiting the knowledge embedded in an expanded set of services provided by an outsourcing supplier.

This study extends the absorptive capacity perspective by showing that a client’s efficiency reinforces its opportunities to absorb knowledge-intensive services from a supplier when expanding the range of operations in the context of BPO.