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In Certain Circumstances, Outsourcing Poses Risks to Vendors

Outsourcing routine tasks, like payroll, customer service, and accounting, offers well-known benefits to businesses and contributes to an economy in which entrepreneurial vendors can support industry and expand employment. However, new research from the Lally School of Management at Rensselaer Polytechnic Institute discovered that not all client-vendor relationships are beneficial for the vendors.

“It’s important to observe and study both sides of a business relationship,” said T. Ravichandran, a chaired professor of information systems in Lally and an author of a new study published in Information Systems Frontiers. “For businesses to thrive, they need a vibrant vendor community that will support growth. But it’s equally important for vendors to be informed on risks involved with the undertaking.”

Ravichandran and his co-author, Sukruth Suresh from St. John Fisher College, examined 231 business process outsourcing announcements spanning 13 years and found that the least beneficial proposition for a vendor tasks them with developing specific capabilities for the client, leading to significant uncertainties. Combined with the complexities associated with managing the client’s expectations, such an arrangement amplifies the vendor’s risks.

“A contract may appear to be lucrative but if it involves significant client-specific investment of vendor resources, our findings show that it is a risky proposition for the vendors,” Ravichandran said. “When vendors fail, it means reduced options for businesses, which directly disrupts the lives of many people through unemployment and strains the economy in general.”

The authors found that the value gains for vendors were substantial when the task being outsourced was well-defined, and required specifically trained workers. Knowledge-intensive processes in areas like supply chain management, finance and accounting services, and research and development are particularly promising. Additionally, the researchers found that contracts of longer duration are generally more beneficial for vendors, no matter the task.

In addition to holding the Irene and Robert Bozzone ’55 Distinguished Chair in Lally, Ravichandran serves the associate dean for research, the director of the Ph.D. program, and the director of the Center for Supply Networks and Analytics.

His research focuses on four broad areas: digital strategies of firms and the mechanisms through which digitization is transforming firms, markets, supply networks and industries, supply chain management and business-business electronic markets; innovation diffusion and assimilation; and organizational renewal and growth through innovation.