The Moderation effect of offshoring service delivery mode on the relationship between degree of offshoring and firm's performance

Purpose: In this paper, we offer a theoretical framework pertaining to the offshoring decision of a firm. Specifically, we ask the question why do firms hand over part or parts of their value chain activity (ies) to providers located in foreign countries (third-party offshore-outsourcing) or perform these activities in-house in the foreign land by setting up captive offshoring centre(s) ( direct offshoring)?. To address this question, we examine if it is more beneficial to the firm to externalize those functions to be performed by foreign providers (third-party offshoring) or internalize those functions to be performed in-house in the foreign country by setting up offshore centres (captive offshoring) by testing the moderation effect of third-party offshoring vs the moderation effect of captive offshoring on the relationship between the firm’s degree of offshoring and the firm’s financial performance. Approach/design/methodology: We test the models using primary data from a sample of 201 Asutralian SMEs, including 73 which are currently offshoring their services. The data was collected through an on-line and a telephone survey targeting a sample of 1000 Australian small to medium-sized firms. Even though the survey was specifically focusing on firms with current offshoring implementations, firms that considered offshoring but have not yet initiated the offshoring of any applications were also surveyed for comparison purposes. The data was analyzed using regression and moderation analysis. Findings: The research hypotheses are still under testing. Research implications/limitations: The survey was limited to small-medium sized firms and findings might be country-specific. Practical implications: This research will have significant implications for both managers and government and non-government organizations engaged in service offshoring. This research might also have international comparative implications since our research has been conducted as a part of the Offshoring Research Network (ORN). Value/Originality: This question is important and very much relevant to the IB and strategy fields as externalization of existing value chain functions as opposed to internalization and externalizing those activities to the foreign providers instead of handing them over to the domestic providers, represent a major departure from current strategic thinking.