To CMM or Not to CMM? Antecedents and Consequences of CMM Certification in the Indian Offshore Industry

Third-party process certification programs such as the Capability Maturity Model (CMM) and the ISO 9000 set of standards have been popular in the IT outsourcing industry as a means of differentiation and quality assurance. Specifically, prior theory in signaling indicates that in markets where there is significant information asymmetry between vendors and potential clients, firms perceive value in acquiring certification so as to provide a reliable signal of higher quality and better processes. Consequently, firms that are certified should experience significant benefits accruing from both their supply and demand sides. We test these hypotheses in the context of the Indian offshore IT services industry on firm-level panel data on 66 vendor firms collected from 1997 to 2002. We first propose a discrete choice model that examines a firm’s decision to acquire CMM Level 3 certification. Subsequently, we study the effects of CMM certification on the firm’s costs and exports. Our results indicate that in accordance with signaling theory, more cost-effective firms and export-oriented firms are more likely to acquire certification. In addition, CMM Level 3 certified firms show significant improvements in exports. Certified firms also see an improvement in their cost efficiency after obtaining certification. Our analysis indicates that the business value of CMM certification in the Indian offshore industry appears to be driven by significant demand-side benefits. This is consistent with prior work in signaling that shows the benefits of indicating better service and quality to potential customers. This helps in reducing the information asymmetry between the firm and clients in the offshore domain, thereby leading to enhanced firm performance.