Authors: avi Aron, Ying Liu
The advent of the internet and its widespread adoption have made bandwidth both ubiquitous and cheap. This in turn allows firms - buyers and sellers of services - to link their information systems and create real-time monitoring and control mechanisms across the boundaries of the firm and across national boundaries. This has led to the emergence of a form of governance that combines aspects of the market and the hierarchy. We term this as the Extended Organizational Form (EOF). We survey the functioning of several offshore EOFs and provide a theoretical model of the EOF based on our survey of BPO contracts in several labor regimes (including the US, UK, Singapore, Mauritius and India). We formulate an analytical model of an incomplete contract between the buyer and seller of services as a multi-stage game. The buyer (client) firm outsources processes to a provider and faces the attendant problems of moral hazard. In addition to the traditional price mechanism, the buyer is able to monitor and control some of the activities of the provider's agents - thus creating a hybrid governance structure. We derive the Subgame-Perfect Nash Equilibrium solution for the game and comment on the welfare implications of the EOF. We compare the results of model with the findings of our multi-country multi-year survey.
Keywords: Offshore Sourcing of Services, Inter-Firm Coordination, IT And New Organizational Forms, Operations and Service Quality, IT and Firm Performance.