The Effects of Capabilities and Governance on Information Technology and Business Process Outsourcing Performance: Client and Provider Perspectives

Research on information technology outsourcing (ITO) and business process outsourcing (BPO) has consistently found that client firm capabilities, provider firm capabilities, and governance mechanisms (contractual and relational) are key determinants of outsourcing performance. These key determinants work together to affect outsourcing performance, however, the information systems (IS) literature has investigated them in a separate manner. This study contributes to the body of IS knowledge by examining capabilities and governance mechanisms influence on outsourcing performance independently and jointly.;Based on resource-based theory, transaction cost economics, and relational exchange theories, we develop a research model to examine the independent and joint effects of one client's capabilities (i.e., client's provider management capability), three provider's capabilities (i.e., human resources management, risk management, and innovativeness), and two governance mechanisms (contractual and relational governance) on two indicators of outsourcing performance (i.e., provider's service quality, and client's economic benefits). Survey data gathered from 306 practitioners in 21 client firms and 20 provider firms is used to test the research model.;Our results indicate that service quality and client's economic benefits have different sets of determinants. Service quality is determined by three provider's capabilities and relational governance. Client's economic benefits are determined by contractual and relational governance, client's provider management capability, and provider's service quality. Our findings also provides evidence that service quality fully mediates the relationships among three provider's capabilities and outsourcing performance. Further, our analyses suggest that there are negative interaction effects between capabilities and governance mechanisms on outsourcing performance. More specifically, in the presence of strong governance mechanisms, the positive effects of client's and provider's capabilities on outsourcing performance are reduced. Last, we also reveal that clients and providers differ in how they view the independent and joint effects of capabilities and governance mechanisms on outsourcing performance. This study provides some important implications for researchers and practitioners pertaining to effective governance of outsourcing arrangements and offers directions for future research.