Managing Risks in Offshore Outsourcing Relationships with China: A Relational View

Abstract

Over the past two decades, offshore outsourcing to emerging economies, such as China, has been viewed by firms as an efficient way to gain competitive advantage. Literature indicates that offshore outsourcing can enhance firms’ competitiveness and efficiency by reducing costs, expanding relational ties, freeing up scarce resources, and leveraging capabilities. However, the research relating to risk management of offshore outsourcing relationships has not been widely reflected in extant literature. This study addresses this research gap by developing a conceptual model that examines the association between management approaches and the risks in offshore outsourcing relationships. This study applies two types of risks being relational risk and performance risk, as dependent variables. Based on social exchange theory and transaction cost theory, this study proposes two management approaches to minimise risks in offshore outsourcing relationships, which are the relational approach and the transactional approach. Empirical testing of the conceptual model employed a quantitative approach using an online survey of 41 managers from Australia and New Zealand. The survey data was analysed using a multiple regression technique, which revealed four valuable findings. Firstly, a higher level of relational risk leads to a higher level of performance risk. Secondly, the relational approach, based on interdependence of outsourcing exchange firms, can reduce performance risk. Thirdly, an increased level of relationship-specific investments contributes to the rise of performance risk. More importantly, the survey results show that relational risk plays a mediating role between relational factors and performance risk. This study recommends that offshore outsourcing firms employ the relational approach to manage performance risk. The mediating role of relational risk also indicates that firms should not just concentrate on minimising the performance risks of offshore outsourcing relationships, but should also manage relational risks due to uncooperative behaviours such as opportunism.