Performance Hazard

Length: 784 words

Financial hazard is defined as ? hazard that ? actual costs might exceed ? planned/budgeted costs of ? outsourcing engagement. In other words: ? fear of ? manager that he will have to pay more for ? service than originally anticipated. To analyze this, Transaction Cost Economics (TCE) was chosen, based on Coase (1937) and Commons (1934). ? analysis of transaction costs allows one to explore efficiencies in hybrid governance structures, for example joint ventures, strategic alliances or franchises (Williamson 1991).

Transactions are ? transfer of goods or services between institutionally separable interfaces (Williamson 1985), which entails specific costs since TCE assumes limited rationality and opportunistic behaviour (Dibbern et al. 2004). In ? BPO context, limited rationality refers to ? limited capabilities of ? outsourcer that render “complete” contracts impossible. Opportunistic behaviour entails that this incapability could be exploited by ? service provider.

? lot of researchers have used TCE to analyze ? outsourcing decision by exploring ? existence and magnitude of transaction costs (Lacity and Hirschheim 1993; Ang and Straub 1998; Lammers 2004). If transaction costs do not outweigh ? production cost advantages of ? service provider, ? bank is likely to outsource. Though, ? question arises as to how this balance

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might change during ? outsourcing venture. If actual transaction costs overrun planned transaction costs, ? bank faces financial losses. From ? BFI manager’s perspective, hazard mainly arises from unexpected transition costs and hidden costs during service delivery.

Unexpected transition costs include unforeseeable set-up costs, redeployment costs, relocation costs or parallel-running costs (Earl 1996). These costs are particularly caused by ? additional human resources needed to transfer ? processes (Cross 1995; Earl 1996). Hidden costs emerge if ? manager assumes that certain activities are included within ? outsourcing contract and they eventually turn out not to be, resulting in costly contract amendments (Lacity and Hirschheim 1993; Lacity and Willcocks 1995).

Additionally, they refer to ? threat of opportunistic behaviour by ? service provider as stated by TCE. Underestimated costs are caused by inexperience or ? inability of ? bank to calculate ? business case correctly (Earl 1996). Severe unexpected switching costs emerge during ? exit phase (when ? contract ends and ? procedure can be back sourced or transferred to another provider) if this issue was not included upfront in ? outsourcing contract, and ? service provider requires fees which are beyond what is economically feasible for his support in transferring ? procedure.

Aubert et al. (1998) used TCE to show that switching costs are particularly high if there is (1) high asset specificity, (2) ? small number of service providers, and/or (3) great inexperience with contractual exit agreements. Performance hazard (? hazard that ? service provided by ? outsourcing vendor will not be delivered as expected by ? bank) can be analyzed using TCE and Agency Theory (AT). AT treats ? difficulties that arise under conditions of incomplete and asymmetric information when ? principal (? bank) hires an agent (? service provider) (Eisenhardt 1989).

From ? principal’s perspective, these conditions entail continuous coordination and motivation issues. ? general assumptions of agency theory are (1) ? principal’s inability to observe ? agent’s behaviour and (2) opportunism of both ? principal and ? agent. Opportunism can be explained using two concepts: moral hazard and adverse selection. Moral hazard emerges if ? agent acts to ? disadvantage of ? principal. Adverse selection is driven by ? agent’s allegation of superior capabilities and produces ? problem of choosing ? “wrong” agent.

As outlined by Aubert et al. (1998), adverse selection emerges when ? service provider does not have sufficient outsourcing experience, and is therefore unskilled in collaborating with ? bank. Moral hazard induces ? hazard of service debasement (Aubert et al. 1998; Bahli and Rivard 2005). ? service provider might reduce his effort in collaborating with ? bank and fail to improve ? procedure if he can use his superior resources in other client engagements instead.

Additionally, there is also ? hazard of procedure multifaceted. As outlined by Aubert et al. (1998), this hazard can be traced back to ? concept of asset specificity as inherent in TCE. If ? asset (procedure) is very specific and requires ? deep understanding of procedure requirements, it is difficult for ? service provider to sustain constantly high quality in procedure execution. Therefore, ? hazard of declining procedure quality due to procedure multifacetedities arises.

? misinterpretation of ? bank’s wants and needs raises ? issue of communication mismatches (Earl 1996; Aubert et al. 1998; Gartner 1999; Willcocks et al. 1999; Aubert, Patry, Rivard and Smith 2001). What initially seems to be clear and unquestionable to one side might result in disputes and litigation due to contrary interpretation by ? other partner. This problem becomes particularly evident if ? bank requires services that have not been included in ? original contract.

? special issue in BPO is ? hazard of data privacy (Gewald and Franke 2005), as ? service provider needs unrestricted access to ? client’s sensitive data to be able to procedure it (Khalfan 2004). Contemporary incidents like ? theft of 40 million sensitive data files from ? service provider of Mastercard (Dash and Zeller 2005) illustrate ? importance of this topic. As BFI institutions very much rely on their reputation for keeping client data confidential (Harris 2002; Nugent and Raisinghani 2002), ? hazard of security breaches is assumed to be of high importance for ? overall performance hazard.

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