Business service outsourcing in manufacturing firms: an event study

Abstract

Purpose Many manufacturing firms entrust partners to provide services on their behalf. However, it is not clear whether and when firms can capture the potential value advantages of outsourcing business services. The purpose of this paper is to investigate the effects of different types of business service outsourcing on firm value. Design/methodology/approach The paper uses event study methodology to estimate the impact of business service outsourcing announcements on abnormal returns of publicly traded manufacturing companies in Europe. Findings External service outsourcing that directly affects the company’s customers leads to more favorable outcomes than internal service outsourcing. This effect is contingent on the strategic outsourcing intention, the service’s reliance on technology, and the choice of the outsourcing partner. Research limitations/implications Findings show that firm value depends critically on the service value it delivers to customers. Future research could explore further contingency variables, and investigate the role of service outsourcing networks and relationships. Practical implications The insights of this study help managers to decide why, how, and to whom they should outsource their business services, as well as how to justify their outsourcing decisions, and how to communicate them toward the financial markets. Originality/value This research sheds light on the value implications of outsourcing decisions. Two types of business service outsourcing are distinguished, namely, internal and external. Furthermore, the study enhances our understanding of a contingency perspective on service outsourcing decisions.