AbstractSeveral reputable industry sources have recognized that many organizations fail to realize the financial benefits sought with outsourcing. Further, prior research has found that outsourcing organizations struggle to estimate accurately the so called “hidden costs” associated with managing these inter‐organizational relationships. This is especially true of complex, globally distributed outsourced services. In this study, we use dyadic data on 102 outsourcing relationships to investigate how dimensions of task‐ and location‐specific complexity influence the degree of control and coordination costs incurred by the customer organization. Results from our hierarchical regression analysis demonstrate that the scale of the service and the geographic distance between the customer and provider locations are associated with higher levels of both control and coordination costs. Task breadth and geographic dispersion are significantly associated with increased control costs, but not coordination costs. Counter to our expectations, control costs decrease with the degree of service customization, whereas both control and coordination costs are negatively related to the average cultural distance between provider and customer organizations. These findings contribute unique empirical evidence to the outsourcing, offshoring, and international service operations literature.

AbstractService provider opportunism is widely noted as a principal risk with outsourcing. Indeed, economic theory regarding the factors which influence the outsourcing decision, treats opportunism as a core behavioral assumption. It is assumed that if given the opportunity, outsourcing providers will act in a self‐serving manner despite the potentially negative impact it may have on their customer. Other researchers have suggested that opportunism is not an unwavering human behavior, but rather can be substantively influenced by the management practices which define the relationship. Building on these arguments, this study investigates the validity of these divergent positions. Hierarchical linear regression is used to examine dyadic data on 102 information technology, logistics, and other business process outsourcing relationships. We test a model which hypothesizes that the buying firm's reliance on different bases of inter‐firm power will have differing effects on the risk of opportunism (shirking and poaching). These hypotheses are evaluated while concurrently examining the influence of exchange hazards (relationship‐specific investments and technological uncertainty) on provider shirking and poaching. The results offer strong evidence that buyer reliance on mediated forms of power (i.e. rewards, coercive, legal legitimate) enhance the risk of both provider shirking and poaching, while non‐mediated power (i.e. expert, referent) is associated with a diminished level of opportunistic behavior. Interestingly, relationship‐specific investments have a significant effect on some forms of opportunistic behavior but not on other forms of opportunistic behavior. Technological uncertainty did not have a significant impact on provider opportunism.