Does strategic outsourcing create financial value ?

As the reach of outsourcing extends to include strategic business functions, a central question for outsourcing managers is whether outsourcing creates value. In contrast with transactional outsourcing, strategic outsourcing is characterised by higher levels of business uncertainty and complex co-ordination requirements. Consequently, strategic outsourcing involves greater contractual risks and requires greater investment in collaboration with the vendor. Based on the conjecture that clients may be unprepared for these management challenges, we test the hypothesis that there may be negative abnormal returns to strategic outsourcing decisions. Data on the 100 largest outsourcing deals inked between 1996 and 2005 show that while transactional deals experienced positive long-term abnormal returns, complex arrangements witnessed significant long-term value destruction. The negative outcomes are exacerbated by low degrees of outsourcing experience and a lack of familiarity with the vendor. The results suggest that clients are unprepared for the management challenges of strategic outsourcing. The results have implications for asset managers in extracting value from their own strategic outsourcing decisions, and also for seeking investment opportunities in firms that manage the externalisation of their value chains effectively. 11 Does strategic outsourcing create financial value? Anitesh Barua is the