Client Satisfaction versus Profitability: An Empirical Analysis of the Impact of Formal Controls in Strategic Outsourcing Contracts

The reach and impact of outsourcing is growing fast to include a variety of strategic objectives. Unlike in transactional outsourcing, where the vendor leverages scale economies to provide standardized services at reduced costs of ownership, client satisfaction in strategic outsourcing is contingent on the extent to which the vendor’ service offering is customized to meet heterogeneous, unique client needs. However, project management practices that lead to high levels of client satisfaction may be incompatible with the project’s financial performance. In this study, we investigate how managerial actions differentially impact project profitability and client satisfaction to elicit trade-offs among these objectives. Using rich field data on 390 strategic outsourcing contracts, we examine the differential impact of output controls, activity controls and capability controls on client satisfaction and contract profitability. We find that activity controls are positively associated with client satisfaction and profitability; in contrast, our results present mixed evidence for capability controls, and negative impact for output controls. In addition to contributing to research in control theory, our results provide actionable insights for vendors into the appropriate strategy and tactics for competing efficiently and effectively in services markets.