Business Process Outsourcing and Market Value of firms

A profound change that has occurred over the last two decades has been the tendency of firms to increasingly outsource tasks and functions that were traditionally done in-house. Business process outsourcing which involves the management and execution of the processes and functions of a firm by an external service provider (Michell and Fitzgerald 1997) first attempted in the mid 90s has become popular more recently with the growth of the Internet and with the recognition that non-core but yet critical processes can be handled offsite by external providers. The potential for cost reduction and the increased flexibility that comes with outsourcing explains why outsourcing is favorably viewed by business leaders. While these benefits are important motivations for firms to outsource, the current trends in outsourcing also reflects the bandwagon effects common when new paradigms come into vogue (Swanson & Ramilier, 2004). The decision to outsource business processes might not always be for reasons of cost reduction but could be driven by pressures to be isomorphic to the environment. Thus it remains to be seen if and whether outsourcing pays off for many of these firms.