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Strategic Outsourcing and Firm Performance: A Review of Literature
Article in International Journal of Social Science and Humanities Research (IJSSHR) ISSN 2959-7056 (o) 2959-7048 (p) · June 2023
DOI: 10.61108/ijsshr.v1i1.5
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ISSN 2959-7048 (Print)
International Journal of Social Science and Humanities Research ISSN 2959-7056 (online)
Vol. 1, Issue 1, pp: (20-29), Month: June - December 2023, Available at: https://researchbridgepublisher.com/
Strategic Outsourcing and Firm

Performance: A Review of Literature
Muo Charles1, Sei Benson Ochieng’2
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Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya
Abstract: Despite the fact that firms collectively contribute to the socio-economic development of the national
economy, most firms nowadays are face difficulties in maintaining superior firm performance; occasioned by
unmanageable business environment uncertainty and changes. It is for this reason that the idea of strategic
outsourcing has evolved in response to changes in the business environment and uncertainty. Despite vast
empirical research on the relationship between strategic outsourcing and firm performance, there is limited
research on influence of strategic outsourcing on firm performance in developing countries. the majority of studies
on the subject have contradictory results, and some have methodological, contextual, and conceptual gaps. Thus,
there is currently conflicting evidence from the body of literature regarding the impact of strategic outsourcing
and firm performance generally, so this research was necessary. The general objective of this study is to review
conceptual, theoretical as well as empirical literature on the relationship between strategic outsourcing and, firm
performance as well as the mediating effect of speed of service and moderating effect of competitive intensity on
the relationship with the view of highlighting the knowledge gaps suitable to form basis for future research. The
review of conceptual framework highlighted the historical development as well as the dimensions and perspectives
of both strategic outsourcing and firm performance. It further discussed the speed of service delivery concept and
the competitive intensity. The underpinning theories were; Resource Based Theory, Transaction Cost Economics
Theory, Social Exchange Theory. The paper further reviewed extant empirical research on the manner in which
strategic outsourcing relates to firm performance. It also reviewed focus as mediating variable and competitive
intensity as moderator of relationships. Based on findings, the paper; proposed theoretical model to explain firm
performance in terms of the indicators of strategic outsourcing and mediated by focus while it moderated by
competitive intensity. In accordance with the reviewed literature, this paper concludes that service integration and
management, offshore outsourcing, and multi-sourcing as measures of strategic outsourcing affect firm
performance which is measured firm efficiency, firm profitability, competitive advantage, customer satisfaction
and employee productivity. The relation is mediated by core competencies (measures of speed of service delivery)
and moderated by predictability of a competitors’ market activity, hostility of a business’ s key competitors, and
breadth of key competitors’ activities (measures of competitive intensity).
Keyword: Offshore outsourcing, Strategic Outsourcing, Multi-sourcing, Firm Performance, Competitive intensity
I. INTRODUCTION
1.0 Introduction
Firm performance is an economic category that reflects the ability of firms in using human resources and material
resources to achieve the targets of the firm (Le, 2005). Firm performance is also to consider the efficiency of using
business means during the production and consumption process. Firm performance shows the correlation between the
output results and input resources employed in the process of business operations of enterprises (Truong & Tran, 2009).
Particular attention is being paid to firm performance by firms all over the world as a gauge of their effectiveness and
efficiency (Samad, 2022). This is because the objective, goal, and strategy that a firm tends to pursue determines how well
that firm performs (Singh et al. 2016). According to existing empirical research, measures of firm performance can be
examined from the perspectives of resources-based theory (Cho & Pucik, 2005), shareholder theory (Tse, 2011), or
stakeholder theory (Harrison & Wicks, 2013), culminating into stakeholder-shareholder theory perspective (generally
referred to as he dual-investor theory). In accordance with demands from stakeholders’ theory and guided by the
shareholder theory, a firm performance is evaluated on the basis of its profitability, growth, market value, total return on
shareholders, economic value added, and customer satisfaction.
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Notwithstanding, businesses around the world are constantly faced with the challenge of maintaining their firm
performance because of the rapidly evolving business environment, intense competition and changes in different
industries in developed, emerging, and developing countries (Arokodare, Asikhia & Makinde, 2019). Firms that are more
nimble, adaptable, and dynamic in tandem with market dynamism tend to perform better in an environment of business
that is constantly changing (Ramos, 2020). In order for firm to maintain their performance, they must be ready to adapt to
new demands and global changes. Notably, the strategic outsourcing concept has evolved as a result of the changing
business environment (Latif, Ismaill, Nazri & Nor, 2018). Since firm see it as a means of achieving strategic objectives,
enhancing customer satisfaction, and enhancing efficiency and effectiveness, strategic sourcing is expanding rapidly
around the globe for this reason (Kihanya, Wafula, Onditi, & Munene, 2015).
Strategic outsourcing is therefore designed to fit with the long-term business strategies. Therefore, rather than focusing
solely on cost reduction, a strategic outsourcing policy must be created from the perspective that it will help to improve
firm performance while taking long-term business implications into consideration (Phutela, 2016). This means that the
business strategy of the company should be in line with strategic outsourcing, and the implementation of strategic
outsourcing should adhere to short- and long-term firm performance objectives. According to (Okeke-Ezeanyanwu,
2017), the impact of strategic outsourcing on productivity is to improve firm performance in terms of productivity,
returns, and capacity or quality for business output. More specifically, strategic outsourcing offers more flexible ways to
lower costs through scale economies and improve performance through range economies (Okeke-Ezeanyanwu, 2017). It
is from that point that service integration and management (Auth & Nägele, 2018), offshore outsourcing (Canello, 2022),
and multi-sourcing are mostly agreed upon measures of strategic outsourcing.
Noticeably, strategic outsourcing's main goal is to make the best use of external resources by utilizing cutting-edge
technologies, market trends, and a high level of expertise in order to increase the effectiveness (firm performance) and
competitiveness of the company. In this instance, a higher level of strategic outsourcing is linked to a focus on core
competencies (Asatiani, Penttinen & Kumar, 2019).
Given the growing intensity of competition, firm are now required to focus their efforts and resources on what is actually
essential to the business, creating a variety of opportunities to outsource processes, functions, and activities (Ramos,
2020; Choi, Ju, Kotabe,Trigeorgis & Zhang, 2017). More so, competitive intensity has been shown been linked with firm
performance (Shirkhodaiea, Sani & Aghbolagh, 2021; Onditi, Kibera, Aranga & Iraki, 2020). Furthermore. empirical
research has shown that industry competitive intensity moderates the relationship between strategic outsourcing and
performance (Cao, Xu & Liu , 2018) Therefore the relationship between strategic outsourcing and firm performance is
moderated by competitive intensity. The presence of rivals of comparable size, the slowing of the industry's growth rate,
the accumulation of excess production capacity, the trivialization of the good, and the rise in unit cost of production
frequently cause the level of competition to increase (Paul, C2021).
Today's customers have higher expectations than ever before and it's harder for businesses to stand out simply by
providing courteous and consistent customer support. Customers expect a high level of service from every business they
interact with and the race has shifted to which company can provide the highest quality of service as quickly as possible.
By focusing on core competences, competences will be able to delivering the products faster to market hence increased
sales and customer satisfaction.
2.0 Statement of the Problem
Literature and research have been seeking identify strategy that businesses can use to improve their performance; where
the strategic outsourcing has evolved as vital response to changes in the business environment and uncertainty (Latif et
al., 2018). Additionally, a number of studies have suggested for the use of strategic outsourcing in resolving firm
performance issues (Ugbomhe, Ugbomhe, Olu & Monday, 2021; Ramos, 2020; Latif et al. 2018; Kihanya et al., 2015)).
Nevertheless, most of these studies, have been having methodological gaps where for instance many studies on
outsourcing and performance are cross-sectional and do not follow firms over time. For example, a study by Mol and van
Tulder (2003) examined the impact of outsourcing on firm performance in the short-term, but did not consider the long-
term effects. A longitudinal study by Lacity and Willcocks (1998) found that the benefits of outsourcing may not be
realized until several years after the outsourcing decision is made.
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In addition, some studies do not have control groups, which makes it difficult to determine the causal relationship
between outsourcing and performance. For example, a study by Doherty and King (2017) examined the impact of
strategic outsourcing on firm performance but did not include a control group, making it difficult to determine the causal
effect of outsourcing on performance. The study by Beulen et al. (2015) examined the impact of outsourcing on
innovation in the Dutch healthcare industry, but did not include a control group of firms that did not outsource. A study by
Mol et al. (2009) found that outsourcing had a positive impact on firm performance, but did not include a control group.
Also, many studies focus solely on the cost savings that outsourcing can provide and do not consider other potential
benefits. For example, a study by Kedia and Mukherjee (2009) found that outsourcing can lead to improved innovation,
but many studies do not examine this aspect of outsourcing. A study by Domberger and Hall (1995) found that
outsourcing did not have a significant impact on the performance of UK local authorities, but did not consider other
potential benefits of outsourcing.
Meanwhile, some studies focus on a specific geographic region, which limits the generalizability of their findings. A
study by Lacity et al. (2010) examined the impact of outsourcing on US firms, but did not consider firms in other
countries Although the impact of strategic outsourcing on firm performance may vary across different industries, many
studies fail to account for industry-specific factors that may affect the relationship. For example, a study by Harun et al.
(2019) examined the impact of outsourcing on firm performance but did not account for industry-specific factors. A study
by Miozzo and Grimshaw (2006) examined the impact of outsourcing on innovation in the UK manufacturing industry,
but did not consider other industries.
Additionally, many studies do not differentiate between different types of outsourcing, such as offshoring, nearshoring, or
outsourcing to domestic suppliers. However, many studies do not differentiate between different types of outsourcing. For
example, a study by Chen and Huang (2019) examined the impact of outsourcing on firm performance but did not
differentiate between different types of outsourcing. A study by Dibbern et al. (2004) examined the impact of IT
outsourcing on firm performance, but did not consider other types of outsourcing. A study by Svensson and Wagner
(2010) examined the impact of outsourcing on innovation, but did not differentiate between different types of outsourcing.
Notably. the effectiveness of strategic outsourcing may depend on various contingency factors, such as the firm's size,
age, and resources, as well as the characteristics of the outsourcing relationship. However, many studies do not consider
these factors when examining the relationship between outsourcing and performance. For example, a study by
Gammelgaard et al. (2016) examined the impact of outsourcing on firm performance but did not consider the
characteristics of the outsourcing relationship
While some studies have examined moderating variables such as firm size and industry characteristics, there are still
many other potential moderating variables that have not been considered. For example, a study by Lacity and Willcocks
(1998) examined the impact of outsourcing on US and UK firms, but did not consider the impact of cultural differences
between the outsourcing firm and the vendor. A study by Mol et al. (2009) examined the impact of outsourcing on firm
performance, but did not consider the impact of contractual arrangements.
Furthermore, the majority of studies on the subject have contradictory results. Thus, generally, there is currently
conflicting evidence from the body of literature regarding the impact of strategic outsourcing and firm performance. So,
despite the extensive empirical research on the subject, this research was made to necessary lock these gaps.
3.0 Conceptual Literature

3.1 Concept of Strategic outsourcing
The term outsourcing has been outlined by numerous researchers in a number of distinct manners. For example, Brown
and Wilson (2015) simply define outsourcing as the provision of services from an outside source, while Fiona (2016)
defines it as a business strategy that takes place when a company purchases goods or services from another or pays a
company to perform services that the company could have performed itself. According to Sako (2016, outsourcing is the
practice of a company contracting with another company to provide services that would typically be carried out by
internal staff). Hence, the practice of entrusting non-core operations or activities from a business to an outside party that
specializes in those operations In the context of this study, strategic outsourcing refers to a long-term, goal-oriented
business partnership between the firm (client) and the service provider.
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The organization of strategic outsourcing ensures alignment with the long-term business goals (Phutela, 2016)..
Organizations expect different changes from strategic outsourcing, which could range from. A plan that outlines how a
business contracts with other businesses or people to complete tasks is called an outsourcing strategy. Instead of relying
solely on internal staff, this strategy can lower costs, boost productivity, and raise the overall quality of the finished
product. The standards, practices, and laws governing how an organization hires people and pays them are called
outsourcing strategies. Depending on its needs, a firm may outsource to a single person, a small business, or a large
corporation. A single business process, a group of processes, or a full cycle of one or more processes can all be included
in the services. The main goal is to streamline production procedures and cut expenses related to the business's core
operations. In some circumstances, maintaining control over the operations of specific departments or preserving non-core
assets and jobs is much more crucial than this business arrangement. In addition to taking responsibility for the outcomes
that these resources produce and for which the client has signed a contract, the outsourcing service provider also takes
responsibility for the human resources, business procedures, and technologies used. Strategic outsourcing differs from the
more limited and conventional provision of services and hiring additional staff because it is accountable for results. The
objective of an outsourcing project is to utilize external resources in a way that maximizes the benefits of the technologies
and know-hows available on the market in order to increase the effectiveness of the business and its competitiveness.
Successful outsourcing leads to the development of a value chain that provides strategically significant resources at every
stage of internal business processes.
3.1.1Perspectives of Strategic outsourcing

Strategic outsourcing perspectives include the; consultant perspective, client perspective, and provider perspective
(Chelliah, Nikolova, & Davis, 2009). From the standpoint of a consultant, a company recognizes that attempts at cost
reduction are the primary justification for outsourcing. The use of outsourcing by businesses is widely acknowledged as a
means of cost reduction. Another reason is to use a specific technology to standardize an activity or a business process
across a corporate group in an effort to become more consistent or transparent. By doing so, a firm can improve processes
and increase effectiveness with more advanced technologies. The desire of businesses to optimize their processes and
increase the effectiveness of their operations is a final crucial issue that is coming to light more and more in outsourcing
agreements (Chelliah et al., 2009).Consultants must have a solid understanding of business based on their prior
professional experience (Handley et al., 2006). Additionally, it has been emphasized that clients should be involved in
problem-solving because they have pertinent, context-specific knowledge that would not otherwise be available to
consultants.
Again from viewpoint of the client, the company's outsourcing efforts vary across various organizational divisions, with
some focusing on it more than others. According to a representative of the company, outsourcing only becomes a
significant issue if the external provider's capabilities are superior to your own (Rajini & Kaluarachch, 2019). A client
may assign a single service provider or a number of service providers with some or all of the organizational
task.Otherwise, a person, unit, or department within the client organization itself could carry out the tasks that the client
organization has outsourced. The decision to outsource is thus a variation of the make or buy decision, in which an
organization chooses to hire an outside service provider (buy) or not (Ikediashi et al (2014). It is suggested that only non-
core business functions are outsourced in outsourcing because it allows the client to focus on their core business.
There are a number of different reasons why businesses engage in outsourcing engagements, from the provider's
perspective (Vorontsovaa & Rusu, 2014). The majority of businesses that engage in outsourcing activities do so in an
effort to reduce costs. Gaining control over a particular business process is another justification for similar efforts in some
instances. Although at first glance this may appear to be a paradox, the increase in control is brought about by the fact that
there are more levers available in an outsourcing contract than there are when using internal leverage. It has been
demonstrated that successful relationships between outsourcing recipients and providers increase outsourcing success
while unsuccessful relationships raise outsourcing costs (Lacity,, Khan &Willcocks, 2009). Improvements in service,
switching to newer technology, access to a wider range of technical expertise, focusing on core competencies internally
rather than outsourcing non-core competencies to an outsourcing provider, and the fact that only a few businesses are
strategically utilizing outsourcing are listed among other reasons to outsource (Su & Mao, 2013). In order to foster the
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growth of the outsourcing provider's capabilities, an outsourcing provider should seek out outsourcing recipients focused
on tactical or strategic outsourcing (Vorontsova & Rusu, 2014).
3.1.2Dimensions of Strategic outsourcing
There are various aspects of outsourcing presented (Davari & Rezazadeh, 2015). Since numerous research investigations
have looked at outsourcing from various angles, the concept's considered dimensions include a number of additional
factors. According to Davari & Rezazadeh (2015), the strategic, technological, task-specific, and economic dimensions
are the key factors. The core capabilities and degree of activity implementation alignment with mission and strategic goals
are the focus of the strategic factors dimension. Less likely to be outsourced are tasks that are regarded as integral to the
organization's primary mission. There are therefore fewer tendencies to outsource an activity the more important it is to
achieving the organization's mission and strategic goals. The organization becomes more flexible and makes better use of
its free resources to add value as a result of outsourcing since it concentrates on its core functions. The level of
outsourcing priority will therefore be lower for activities that are in some way related to core competencies.
A proper strategy is needed in order to manage technological factors when they are faced with changes, according to the
technological factors dimension. Since not all changes are predictable, it is practical to have schedules for important
decisions to be made, such as outsourcing, in these situations.
Task Specifications investigates the details of contracted out activities. Although the organization makes use of cutting-
edge tools and technology to carry out these tasks internally, outsourcing is rarely an option. Other firms have given
preference to outsource certain tasks since they're thought to be within their scope of expertise. Such activities must be
performed internally, which necessitates a significant investment in tools and resources. As a result, outsourcing
tendencies increase the further an activity is from the organization's area of expertise.
The cost of internally providing services versus outsourcing to external sources is contrasted in the economic factors
dimension. When examining outsourcing from the perspective of transaction costs, aspects of cost cutting are highlighted
(Davari & Rezazadeh, 2015). Concerning the idea that outsourcing tends to increase the more partners benefit from it,
businesses may place a strong emphasis on cost savings due to a variety of economic factors like poor financial standing
or rising profitability. The literature on outsourcing demonstrates that there is consensus regarding its advantages, and
both the client and service provider are more likely to improve their performance as a result of outsourcing.
The dimensions of strategic outsourcing are; service integration and management (Auth & Nägele, 2018), offshore
outsourcing (Canello, 2022), and multi-sourcing (multisource). The increasing sophistication of the provider terrain,
distributing the services they are destined for, their comparative performance, end-user satisfaction, and alignment with
business objectives are major challenges that businesses should indeed manage regardless of whether the offerings are
outsourced internally or externally (Arora & Sengupta, 2013). Whether services are outsourced internally or externally,
businesses must manage the growing complexity of the provider landscape, delivering the intended services, comparing
their performance, end-user satisfaction, and alignment with business objectives (Arora & Sengupta, 2013). As it becomes
more challenging to realize the original benefits of outsourcing in a multisource, multivendor environment, the need for
the management concept known as Service Integration and Management, or SIAM (Auth & Nägele, 2018).
Comprehensive service integration and management (SIAM), which lessens the governance burden while enhancing
performance management, financial discipline, and business user satisfaction, has the potential to allay these worries.
SIAM services may be offered by the business organization itself, through outsourcing to an outside provider, or through
a combination of both. In order to better serve customers and compete, many manufacturing companies have created
service businesses in recent years and integrated them into their current business models (Kim & Kwak, 2015). As a result
of expanding their businesses into the service sector to become solution providers, these businesses, which are up against
growing competition, greatly profit from service integration. This is especially true for capital goods companies.
According to studies by Zhang, Li, Sun, Li, Samad, Comite, and Matac in 2022, Auth, G. & Nägele in 2018 and van
Duijn, Zonneveld, Montero, Minkman, M., & Nies (2018), service integration improves the performance of businesses by
integrating data and allowing the systems that contain it to communicate with one another.
In the face of a highly competitive and complicated business environment. firm are encountering structural demands that
drive them to externalize operations and services to other nations (Guitián & Sison, 2022). More specifically, over the
past few decades, there has been a sharp rise in the number of companies outsourcing their operations abroad. In this
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context, offshore outsourcing, the practice of moving business operations overseas, is becoming increasingly important as
businesses look to take advantage of advantages like lower labor costs, access to natural resources, and the ability to draw
on a variety of knowledge sources (Canello, 2022). Because of improvements in cost differentials, organizations have
been increasingly turning to offshore outsourcing (Nieves-Rodrguez, Palacios-Chacón, Pérez-Rivera & Quiones-Cintrón,
2018). An offshore outsourced operation entails the implementation of a sizable amount of work abroad. The practice of
moving some or all of a company's operations or procedures to a third-party service provider in another country is known
as offshore outsourcing. In order to meet their demands for highly skilled, competitive workers, businesses are
increasingly outsourcing internal business processes to low-cost locations outside of the country of origin of the buying
firm. As a result, outsourcing to countries outside is seen as a way to cut labor costs for services that depend heavily on
skilled labor for effective delivery (Guitián & Sison, 2022). Simply stating that an integration of environmental pressure,
competitive pressure, and efficiency (firm performance) drive offshore outsourcing.
According to O'Connor et al. 2022, multi-sourcing is a collaborative design decision that can assist consumers in
gathering important data to enable cost and performance comparability across various sources. Enterprises that choose this
strategy can also benefit from multi-sourcing by encouraging vendor competition, reducing costs and improving the
quality of service agreements, and enabling providers to innovate and work together. Multi-sourcing is a form of
outsourcing that many businesses use when there are constant changes. Contrary to traditional outsourcing, the multi-
sourcing model uses multiple vendors for the same product at various times (Kostiuchenko, 2020). The choice is based on
the security level. The optimization of operating costs is possible with these steps. However, it's crucial to consider the
risks before choosing multi-sourcing.
3.1.3 Adoption and Outcomes of Strategic outsourcing in Strategic Management

The primary goal of strategic management is to identify the most effective means of preserving or enhancing competitive
advantage through cost reductions or differentiation from the competition, which places strategic outsourcing among one
of many approaches to achieving this goal (Doval, 2016). Businesses that successfully integrate the outsourcing theology
into their business strategies are able to quickly expand within the sector. The rationale behind the strategic decision is
that nearly every company can significantly increase the amount of resource leveraging they do through strategic
outsourcing by developing a small number of carefully chosen core competencies that are important to customers and in
which the business can be world-class, concentrating management and investment attention on them, and strategically
outsourcing a large number of other activities where it cannot be or need not be the best. In its core activity, an
organization can better focus on its strategic tasks and objectives with the aid of outsourcing (Koszewska, 2004).
Therefore, outsourcing is a strategic desicion made by a firm to lower costs and boost efficiency by hiring another person
or business to carry out duties, offer services, or manage operations that were previously handled by employees within the
business. In other words, outsourcing is the practice of contracting out the performance of specific job duties to third
parties.
3.2 Historical Background of Firm Performance

The term performance was first used to characterise a sporting contest's results in the middle of the nineteenth century
(Elena-Iuliana & Maria, 2016). In the 1950s, firm performance was compared to organizational efficiency, which
measures how well an organization, as a social system with some constrained resources and means, accomplishes its
objectives without requiring excessive effort from its members. Productivity, adaptability, and tensions between
organizations were the factors used to evaluate performance (Taouab & Issor, 2019). Organizations started looking into
novel performance evaluation techniques between the 1960s and 1970s. During this time, an organization's performance
was characterized as its capacity to take advantage of its surroundings in order to access and utilize the scarce resources
(Yuchtman & Seashore, 1967). Performance was equated with organizational effectiveness at this time and was linked to
productivity, conformity, and institutionalization.
The concept of organizational performance was linked to levels of member motivation and satisfaction, productivity rate,
and late 1970s (Lupton, 1977). The ability of a company to create value for its clients was seen as being extremely
important to its performance in the 1980s. This was defined as the degree to which an organization, as a social system,
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could take both its means and its ends into consideration (Robbins, 1987). As a result, firm performance began to be
regarded as a concept of an organization's success or effectiveness; it serves as a benchmark for how successfully a firm
achieves its objectives. As a result, the firm was seen as dependent on the productivity of its employees. Additionally,
Harrison and Freeman (1999) recommended including meeting stakeholder demands as a significant indicator of firm
performance, while Cohen (1994) included resources in firm performance indication. Utilizing resources, achieving goals,
being relevant to its users, and incorporating competitiveness, efficiency, and effectiveness into measures of firm
performance (Taouab & Issor, 2019; Verboncu & Zalman, 2005). Performance has become a crucial topic in management
research in recent years because it is frequently used as a parameter.
3.2.1 The Concept of Firm Performance

In strategic management research today, firm performance has gained importance and is recurrently used as a dependent
variable (Taouab & Issor, 2017). Regarding its definition and measurement, there is hardly any agreement. While
Arokodare and Asikhia (2020) defined firm performance as an organization's continuous improvement in financial
metrics like profit after tax, return on assets, return on equity, net income margin, and return on investment, among other
things, Taouab et al. (2019) indicate that firm performance is defined and measured in terms of: profitability, growth,
market value, total return on shareholder, economic value added, customer satisfaction, based on the stakeholders'
expectations. Bartueviien and Akalyt (2013) defined performance as the relationship between output and economic and
social development, whereas Siepel and Dejardin (2020) defined firm performance as its ability to maximize opportunities
for profit. Efficiency is the relationship between output and profitability in the translation of input into output. According
to Coad et al. (2017), profit is the primary factor influencing future growth and serves as a gauge of financial
performance. However, the achievement of market and financial goals is what the term "firm performance" refers to
(Samd, 2022). In this paper, firm performance means accomplishment of a certain task with a level of effectiveness and
efficiency that exceeds the generally acknowledged norms
The ability of businesses to use both human and material resources to achieve their goals is measured by a concept in
economics known as "firm performance" (Nguyen et al., 2021). The effectiveness of using resources during the
manufacturing and consumption procedures is another factor in determining firm performance. The performance of a firm
demonstrates the relationship between the output outcomes and the input resources used during an enterprise's business
operations (Truong & Tran, 2009). The business objective, goal, and strategy that a firm tends to pursue determine how
well it performs (Singh et al. 2016). Businesses possess a system for measuring performance to manage the performance
objectives, claim Quesado et al. (2018). In 2020, Truong, Nguyen, and Duong looked into how much determinants
affected the application of the Balanced Scorecard. The findings demonstrate that the Balanced Scorecard application was
effective in evaluating performance. The vast majority of firm use performance indicators that include financial and non-
financial factors like market or customer, human resources, internal business processes, external environmental indicators,
operational efficiency, and quality (Duric and Topler 2021; Samad & Ahmed 2021).
3.2.2 Perspectives of Firm Performance
Managers and accountants have different perspectives on organizational performance (Demeke & Tao) (2020). The
financial performance of organizations is the focus of accountants, whereas managers are concerned with how to enhance
current and future firm performance. On the other hand, the BSC approach combines both historical accounting
perspectives and operational measures. The various firm performance perspectives include those that focus on accounting,
balanced scorecards, strategic management, entrepreneurship, and microeconomics (Demeke & Tao; 2020).
Accounting perspective, which focuses on the information contained in the organization's financial statements and
measures, where a substantial amount of accounting rules and procedures have been developed to make the information in
organizational financial statements both meaningful and comparable over time and across organizations (Lev, 1989). The
Balanced Scorecard Perspective suggested that in order to gauge overall firm performance, a combination of financial and
operational measures are required (Kaplan. 1984). The BSC approach incorporates operational measures on customer
orientation, organizational effectiveness, and learning and growth, which are the factors that will determine future
financial performance, in addition to financial measures that reflect the effects of recent actions (Kaplan & Norton, 2005).
The balanced scorecard method has the drawback of using operational measures that are specific to each organization
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while still being doable for implementation by organization insiders. This limits its applicability to researchers because it
is situation-specific rather than situation generic. The variables used in the balanced scorecard must therefore be
applicable to the entire population of interest in order for generalization to be possible across companies.
Notwithstanding, a balanced scorecard is typically unworkable in a research application because it works best when it is
customized to the unique circumstances of each organization. Because of this, the balanced scorecard offers a
multidisciplinary perspective on organizational performance. According to a strategic management perspective, firm
performance consists of three distinct areas of organizational results: financial performance (profits, return on assets, and
return on investment); product-market performance (sales, market share); and shareholder return (total shareholder return,
economic value-added). According to each author's perspective, organizational performance is typically viewed from a
multi-constituency, multi-dimensional perspective in strategic management.
It offers a solitary viewpoint on how organizations perform from the perspective of entrepreneurship (Slevin & Covin,
1995). Similar to research in strategic management, entrepreneurship researchers take a multi-faceted approach to
performance, acknowledging that there are inherent tradeoffs between matters like growth and profitability. As a result,
the organizational performance perspective on entrepreneurship is multi-dimensional and multi-constituency.
The owners of the company are primarily related to the microeconomic perspective. As long as they receive or anticipate
receiving a return that is commensurate with the risk they assume, the owners of the assets will contribute to the
organization. The owner's alternative uses for the assets are one factor that affects satisfaction. In other words, the value
that a firm develops for the owners of assets it receives must be at least as substantial as the value anticipated ( Barney,
2022).
3.2.3 Measuring firm performance
Financial analysis has historically been used by investors, decision-makers, creditors, and other stakeholders to assess a
firm's performance because many analysts believe that a firm's performance and its financial performance are nearly
identical (Mihaela, 2017). Nevertheless, the growth and theoretical foundation of the firm can best be understood by
looking at metrics of firm performance. The RBV, Shareholder Theory, Stakeholder Theory, and the BSC are the theories
that highlight the different ways in which firm performance may be assessed in various contexts and areas. RBV examines
corporate performance from a strategic management perspective, focusing on achieving and sustaining competitive
advantage to raise corporate productivity and, ultimately, corporate profitability (Hendi, Basri & Arafah, 2022). This
theory explains how a firm can acquire and maintain an advantage over rivals in order to increase productivity and,
ultimately, profit. Consequently, RBV proposes competitive advantage, firm efficiency, and firm profitability as the
metrics for measuring firm performance.
The shareholder theory demonstrates that an organization's performance is assessed based on its profitability, growth,
market value, total return to shareholders, economic value added, and customer satisfaction. In keeping with the theory, a
firm's performance can be measured in terms of the total utility it creates for all of its legal stakeholders or in terms of the
total value it creates through its operations. When firm performance is examined from the viewpoints of resource-based
theory, shareholder theory, and stakeholder theory, it culminates in a stakeholder-shareholder theory perspective, which is
commonly referred to as the dual-investor theory (Cho & Pucik, 2005; Tse, 2011; Harrison and Wicks, 2013).
The dual-investor theory was thought to have been expanded by Rothaermel (2017), who developed a similar method of
measuring firm performance that incorporates the balanced scorecard and three standard performance dimensions:
accounting profitability, value for shareholders, and financial value (BSC). The Stakeholder Theory, on the other hand,
sees firm performance in terms of the total utility created for all of a firm's legal stakeholders, or in terms of the total
value created by the firm through its operations. Stakeholder-shareholder theory, also known as the dual-investor theory,
is the conclusion of an analysis of firm performance from the perspectives of resource-based theory, shareholder theory,
and stakeholder theory (Cho & Pucik, 2005; Tse, 2011; Harrison and Wicks, 2013).
According to Rothaermel (2017), who developed a similar method of measuring firm performance that incorporates the
balanced scorecard and three standard performance dimensions—accounting profitability, value for shareholders, and
financial value—the dual-investor theory has been expanded (BSC). According to shareholder theory financial measures,
BSC improves firm performance in three crucial non-financial areas: relationships with customers, key internal processes,
and learning and development (Pham, Vu, Pham & Vu, 2020). While the company's relationships with its customers, key
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internal processes, and employee learning and growth all contributed to the introduction of customer satisfaction, firm
efficiency, and employee productivity, respectively. As a result, BSC suggests that firm profitability, customer
satisfaction, firm efficiency, and employee productivity be used to measure performance (Kaplan & Norton, 2005). Pham
et al. (2020) evaluated performance based on the influence of variables in the BSC model to show that the BSC model's
components have an effect on firm performance (Truong et al., 2020).
The intersection of the BSC, shareholder theory, and stakeholder theory leads to competitive advantage, firm efficiency,
firm profitability, and customer satisfaction as the final outcomes for the measure of firm performance (Truong, Nguyen
& Duong, 2020). Thus, it shows that the likelihood that businesses will increase their financial value, grow, and develop
their production in order to satisfy their customers and fulfill their obligations is higher the more successfully the firm
performs (Nguyen, Nguyen, Nguyen, & Do, 2021; Mihaela, 2017). Guided by the dual-investor theory (Shareholder
Theory, and Stakeholder Theory), BSC, RBV, the measures of firm performance include firm efficiency, firm
profitability, competitive advantage, customer satisfaction and employee productivity (Kaplan & Norton, 2005. Truong et
al., 2020; Hendi, Basri & Arafah, 2022)
3.2.4 Speed of service delivery
Speed of service refers to a metric that gauges the duration it takes to finish a customer service task ((Rust & Zahorik,
1993)). It can be applied at various points along the customer journey and utilized differently depending on the company,
product, and industry. stated Firm are expecting more from customer service teams, so speed of service is becoming an
important metric in improving the customer expectations. In addition to being meticulous, thorough, and tenacious, a firm
need to possess a sense of urgency in service delivery if it wants to succeed. Therefore, service delivery made by service
providers in order to satisfy the needs and wants of customers speedily.
Furthermore, the services must be provided fast in order to provide customers with timely service ((So, 2000). Being
responsive means being accommodating of the customer's needs, providing the service promptly, and being flexible with
them (Parashuraman et al, 1985) Dereje (2017) stated that satisfying customers is based on knowing or understanding
customers need and behaviour and address such with a suitable quality products and services as demanded by the
business, and doing this above other competitors (Boltan 1998).
Furthermore, Customers today have higher expectations than ever before, making it more difficult for businesses to stand
out simply by offering cordial and reliable customer service. Customers demand excellent service from the firm they deal
with, so the competition now centers on which firm can deliver the best service as quickly as possible. (Afande, 2015).
So, service should be given in best quality in order to satisfy customers. creating a relationship between the quality of
service delivered and customer satisfaction (Odunlami. 2015). To make customer satisfied on the service delivery service
providers should know the service quality level that is needed to satisfy customers judge service quality as the extent to
which perceived service quality matches with the initial expectation (Rust & Zahorik, 1993). Therefore, the key indicators
of service delivery re quality, service, speed, customer service and innovativeness
3.2.5 Competitive intensity
While some studies have linked competitive intensity to performance, others have suggested that it can moderate effects
on performance. While Onditi, Kibera, Aranga, and Iraki's (2020) study found that competitive intensity moderated the
relationship between market orientation and performance, Shirkhodaiea, Sani, and Aghbolagh (2021) found that
competitive intensity in the industry has a positive and significant impact on brand performance. Additionally, Cao, Xu,
and Liu (2018) argued that the fiercer the competition, the better SMEs will perform globally. This shows that for the
globalization company, the level of industry competition needs to be higher for SMEs to grow and perform better. In light
of this, the present study postulates that the degree of competition may be able to moderate the relationship between
strategic outsourcing and firm performance (competitive intensity). When gauging the level of competition. The proposed
measure of competitive intensity takes into account the aggressiveness of a business's main rivals, the predictability of
their market activity, and the scope of their activities.
4.0 Literature Review
An extensive review of the vast body of relevant theoretical and empirical literature was carried out as guided by the key
construct in this conceptual review. This section therefore, presents the theories that underpin the construct of Strategic
Outsourcing and Firm Performance as well as related empirical literature.
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4.1Theoretical Review
Three theories namely, Resource Based Theory, Transaction Cost Economics Theory, Social Exchange Theory were
reviewed as presented in the preceding section.
4.1.1Resource Based Theory
Resource-Based Theory (RBT) was first put forward by Penrose (2009), who proposed a model on the effective
management of firms' resources, diversification strategy, and productive opportunities. Penrose’s publication was the first
to propose conceptualizing a firm as a coordinated bundle of resources to address and tackle how it can achieve its goals
and strategic behavior (Penrose, 2009). RBT began to take shape in the 1980s.The antecedent of RBT was the Theory of
the Growth of the Firm. Later, during the 1990s, Jay Barney’s work was critical to the emergence of RBT and became the
dominant paradigm in strategic management and strategic planning.
RBT provides a framework to highlight and predict the fundamentals of organization performance and competitive
advantage. The focus of RBT on the firm’s performance based on meso perspectives was a reaction to the earlier
managerial interest in the industry structure, a more macro perspective. RBT addresses an internally-driven approach by
focusing on internal organization resources, as opposed to externally driven approaches to understanding the
accomplishment or failure of leveraging organizational activities (Kozlenkova, Samaha & Palmatier, 2014). It aims to
elaborate on imperfectly imitable firm resources that could potentially become the source of sustained competitive
advantage (Barney, 1991).
RBT emphasizes the firm’s resources as the fundamental determinants of competitive advantage and performance. The
principle behind this theory is that firms achieve sustainable competitive advantage by continuously developing existing
resources and creating resources as well as capabilities. in response to the dynamic market conditions (Peteraf, 1993;
Day, 2011). Resources are valuable when they allow the firm to take advantage of opportunities in the environment and/or
withstand competitive threats which justifies both the possession and utilization of resources (capabilities) should be in
place for firms to achieve competitive advantage.
Resources and capabilities in this context are conceptualized as bundles of tangible and intangible assets, including a
firm’s management skills, its organizational processes and routines, and the information and knowledge it controls that
can be used by firms to help choose and implement strategies (Naido, 2006). Among other things, RBT contends that
although organizations require valuable, rare, inimitable, and non-substitutable resources to obtain a competitive
advantage, these resources and capabilities can reside outside the boundaries of the firm. From this perspective,
competitive advantage is achieved through the interplay between organizations and their external environment.
The focus here is on how supply chain linkages or inter-firm relationships provide access to strategic resources in order to
provide a competitive advantage. From this perspective, therefore, the decision to outsource is not based on the logic of
outsourcing non-core activities to focus on core activities to achieve a competitive advantage. Instead, the primary driver
to outsourcing is to obtain access to resources that cannot be easily reproduced or substituted by competitors. These
resources do not need to be owned (Dyer and Nobeoka 2000).
McIvor 2010 Case RBT Constructs a 2by2 RBT matrix that analyzes capability (performance disparity and resources) and
competitive contribution (value and imitability potential). Identifies RBT variables in outsourcing decisions, but RBT
alone fails to explain opportunism. Similar to the develop capability case, some production is kept in-house in the
benchmark and develop supplier case, which then maintains in-house complementary knowledge and competencies to
support and develop suppliers. However, the manners in which outsourcing is applied compared with the develop
capability case is very different. Whereas the benchmark and develop suppliers case use in-house manufacturing as more
of a complement to outsourcing, the develop capability case initially keeps the majority of production in-house.
The concept applied by the benchmark and develop supplier case is closely related to the aim of continuous cost
benchmarking and creating cost transparency. Here the aim is retaining a focus on price to avoid unmotivated increases.
Thus, a cost driver is clearly obvious in the benchmark and develop suppliers case, which views both in-house production
and the supplier as a supply base. In contrast to several other make and buy studies (e.g. Jacobides and Billinger, 2006;
Puranam et al., 2008; Mols, 2010a), the benchmark and develop supplier case does not apply a mixed strategy to access
competencies that would be difficult and costly to develop internally (e.g. Quinn, 2000). Instead, component production is
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kept in-house, which then keeps in-house complementary knowledge and competencies to support and develop suppliers
(benchmark and develop suppliers case).
In this sense, the benchmark and develop suppliers case aligns well with studies that argued for a mixed strategy to
transfer knowledge from in-house to external suppliers (e.g. Parmigiani and Mitchell, 2009; Mols, 2010b). Most
production is outsourced, but the case description illustrates the need to keep in house complementary competencies that
are required to support the company’s core competencies. Previous studies found similarly that retaining such
competencies in-house to ensure continuous competence development (for productivity gains, for example) can even
outweigh the cost advantages from outsourcing (see Broedner et al., 2009).
4.1.2 Transaction Cost Economics Theory
The theory of transaction cost economics (TCE) was initially proposed by Williamson (1979; 1981) to understand how
organizations manage costs through boundary setting. The theory views organizations not primarily as systems for
producing things, but rather as systems for coordinating interactions, or transactions. Thus, the basic unit of analysis for
understanding how organizations work is the transaction, which broadly includes the transfer of any valuable resource
used by the organization from one entity to another.
For organizations, transactions are inherently costly because they require negotiation and represent opportunities for
things to go wrong, which in turn can impede the organization’s goals. For example, if the tires are not available when
they are needed (i.e. the “tire transaction” breaks down), the organization’s goal (i.e. making a car) is hindered.
Williamson (1981) argued that organizations seek to manage these transaction costs by drawing their boundaries
strategically so that some transactions take place inside the organization, while other transactions take place outside the
organization. In the car tire example, the issue of where to draw organizational boundaries involves asking: Should we
make our own tires (internalize the transaction), or should we buy them from an outside supplier (externalize the
transaction)?
This theory is predicated on the idea that firm outsource their operations to cut costs associated with transactions (Igew,
2021). The TCE theory is the most common decision-making theory used by researchers to evaluate the implications for
overall costs associated with outsourcing (Hopwood, 2018). In order to reduce the costs of organizational transactions, the
strategy essentially seeks to identify environmental factors that work in unison with a group of associated human
characteristics (Austin-Egole & Iheriohanma, 2020). Agburu Anza and Iyortsuun (2017) state that a firm might indeed
outsource even if it has the ability to carry out the activity internally if the total cost of having an outside agent carry out
the activity, including all costs associated with contract processing, is lower than the total cost of carrying out the activity
internally. According to the general premise of transaction cost theory, firms can be attributed to market failure, and their
main goal is to reduce transaction costs by selecting the best governance structures.
The TCE theory has been used by some researchers to shed light on how to lower transaction costs by putting in place
practical measures to mitigate the cost factors associated with outsourcing through a sound governance infrastructure
(Igew, 2021; Hopwood, 2018; Agburu et al., 2017). The theory's central tenets include behavioral presumptions of
bounded rationality and opportunism as well as characteristics of a transaction (asset specificity, uncertainty, frequency,
and complexity) (Brewer, Wallin, & Ashenbaum, 2014). According to Brewer et al. (2014), the TCE theory and the RBV
worked together to help people understand outsourcing decisions. According to Brewer et al. (2014), while the RBV was
a better predictor of outsourcing performance, researchers could use the TCE theory to identify opportunistic behaviors.
TCE theory proponents claimed that leaders who used effective outsourcing strategies produced favorable results. On the
other hand, poorly executed corporate outsourcing initiatives can result in significant losses and raise quality issues
(Marchewka & Oruganti, 2013). The TCE theory was appropriate for the study because it gave me a lens through which
to examine the various aspects of a transaction that influenced choices and methods for reducing the numerous
outsourcing risks that had an impact on business outcomes.
In their case studies, (McIvor 2011, 2009,2008 ) Integrating RBT and TCE States that both TCE and RBT are needed but
can sometimes provide contradictory views. They Proposed a three-dimensional framework – contribution to
competitiveness; relative capability; potential for opportunism – resulting in five sourcing strategies. Potential for
opportunism managed by an appropriate relationship strategy (arms-length vs relationship)
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Much of the theoretical underpinnings of outsourcing rest on the assumption that a supplier market exists that can manage
the activities considered for outsourcing, and that an actor in the market will always exist that is better suited to producing
the outsourced activities (e.g. Williamson, 1985). However, the outsourcing of non-competitive production case clearly
illustrates the struggle to find developed suppliers and also the risk of lock-in.
In this view, a mixed strategy has the potential to act as a safeguard to lower dependency risks in outsourcing strategy,
flexibility refers more to keeping complementary competencies. However, at the same time, this concept arguably shows
that flexibility means that finding the most optimal solution in each individual situation is not always possible. For
example, from a TCE perspective, a mixed strategy may imply the risk of not finding full pooling effects, which is related
to not being able to fully rationalize in-house production (i.e. dividing the volume between in-house and supplier
production). Thus, in view of a TCE, parallel production should theoretically lead to higher costs (Williamson, 1985).
At the same time capacity regulator strategy illustrates that full outsourcing might not be an appropriate strategy even if
the external source offers lower costs. Instead, parallel in-house production works as a buffer to improve production
flexibility and to avoid costly production interruptions. In this way, a mixed strategy has the potential to act as a safeguard
to avoid one of the most argued dependency risks in TCE, namely small number bargaining and, thus, the risk of supplier
opportunism (Williamson, 1985) and revenue appropriation (Walker, 1988). If one perceives that a non-developed
supplier market exists – what Walker et al. (2005) also termed an imbalanced supply market – a mixed strategy is a way
to maintain control over development and market prices.
TCE effectively rests on the assumption that a supplier market exists that can manage the activities considered for
outsourcing and that an actor in the market better suited to producing outsourced activities will always exist (e.g.
Williamson, 1979). Without such a market, the buyer is viewed as needing to help develop this market. Other researchers
have argued that transaction-based outsourcing logic is insufficient. Holcomb and Hitt (2007) extended TCE and RBT to
explain the conditions leading to strategic outsourcing.
4.1.3 Core competencies theory
The term core competency was coined by the leading management experts, CK Prahalad and Gary Hamel in an article in
the famous Harvard Business Review. By providing a basis for firms to compete and achieve sustainable competitive
advantage, Prahalad and Hamel pioneered the concept and laid the foundation for companies to follow in practice.
It prescribes actions to be taken by firms to achieve competitive advantage in the marketplace. The concept of core
competency states that firms must play to their strengths or those areas or functions in which they have competencies. In
addition, the theory also defines what forms a core competency and this is to do with it being not easy for competitors to
imitate, it can be reused across the markets that the firm caters to and the products it makes, and it must add value to the
end user or the consumers who get benefit from it.
Core Competency Theory has been useful in explaining the focus on core functions. It contends that firm activities should
either be carried out internally or by external service providers (Nzitunga, 2019). It depends on the decision to make or
buy. The best service providers who are specialists in that area should be considered for outsourcing non-core activities.
But a select few non-core tasks that significantly affect competitive advantage ought to be kept in-house. The collective
knowledge of the production system in question is referred to as having "core competencies," specifically knowledge of
the procedures and the best ways to integrate and optimize them. The practice of outsourcing non-core competencies is
becoming more and more significant as it places duties like maintenance and transportation functions in the hands of
vendors most qualified to carry them out successfully (Chandra & Kumar, 2000). Competence of vendors plays a
significant role in the success of an outsourcing arrangement (Levina & Ross, 2003). Therefore, in such a cutthroat
economic environment, core competencies that produce tangible results for an organization's performance are essential
(Asamoah, 2020). Asamoah (2020) emphasized the connection between core competencies and competitive advantage,
and Wright et al. (1995) emphasized the connection between competitive advantage and firm performance. A firm's
management's core competencies must take center stage in the formulation of its strategy because they are a significant
source of profitability. In order for a firm to gain a competitive advantage, its strategy must make the most of the
resources over which it has control and those that are poised to do so while overcoming the intensity of the market.
However, criticisms of the Core Competencies Model include the argument that focusing on core competencies can
constrain an organization’s ability to adapt. The human element is also ignored to the detriment of the organization. If an
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accountant is outsourced, how do they feel inclined to do the best job they can for a company when someone else is
paying their salary Outsourcing almost every noncore activity can be over-zealous. Over-zealous outsourcing can lead to a
loss of competitiveness as skills that the business had and now lost.
4.1.4 Social Exchange Theory
The Social Exchange Theory (SET) developed by John Thibaut, George Homans, Peter Blau, and Harold Kelley, is a
sociological and psychological theory that studies the social behavior in the interaction of two parties that implement a
cost-benefit analysis to determine risks and benefits. The theory also involves economic relationships—the cost-benefit
analysis occurs when each party has goods that the other parties value. Social exchange theory suggests that these
calculations occur in romantic relationships, friendships, professional relationships, and ephemeral relationships as simple
as exchanging words with a customer at the cash register. Social exchange theory says that if the costs of the relationship
are higher than the rewards, such as if a lot of effort or money were put into a relationship and not reciprocated, then the
relationship may be terminated or abandoned.
The main components of people's social behavior are explained by the SET. The framework begins by defining the
reinforcement mechanisms that support people's motivation to interact with others. A resource in this instance is an
attribute that enables the reward and encourages individuals to engage in exchange relations (Emerson, 1976). Resources
include cash, knowledge, goods, and services (Davlembayeva & Alamanos, 2023). The degree of a resource's tangibility,
or concreteness, is the second dimension of resources. Resources with little tangible value may be viewed as symbolic and
hold greater value for recipients (Cropanzano & Mitchell, 2005). Third, social structures and social capital factors
encourage social exchange relations (Blau, 2017). The reliance on social structures illustrates how interactions' outcomes
depend on how the parties initially interacted with one another (Redmond,2015). Social capital is a term used to describe
a variety of social entities, such as expectations, norms, laws, channels of communication, and obligations. These things
are a part of social organization structures.
Social capital has the power to both promote and impede the growth of social relationships and the outcomes that result
from them. Reciprocity, the penultimate mechanism underlying social exchange, establishes obligations between the
parties (Suhermin & Harjanti, 2019). According to the justification for reciprocity, people are predisposed to act in ways
that ensure reciprocity because of evolution such competitive intensity (Thibaut & Kelley, 2017). The theory's
fundamental premises are based on how strong the relational ties are. When voluntary exchanges are founded on solid
relational ties between partners, trust between the partners develops.
While the theory can help someone take a broad look at a relationship, there are many more factors to consider in terms of
whether they should continue or end the relationship. It doesn't address selflessness or altruism.
4.2 Empirical Literature Review
4.2.1 Strategic outsourcing and Firm performance
A study by Mol and van Tulder (2003) examined the impact of outsourcing on firm performance in the short-term, but did
not consider the long-term effects. A longitudinal study by Lacity and Willcocks (1998) found that the benefits of
outsourcing may not be realized until several years after the outsourcing decision is made. An examination of the impact
of outsourcing on firm value requires focusing on both the user of the products or services and the provider of them.
Strategic Outsourcing can yield both longer-term gains and immediate payoffs. When a product or service costs less, it
frees up capital for alternative uses. When the less costly service is deployed in value-creating areas, savings from
sourcing should accrue to investor wealth in the longer term. But lower costs can also yield better margins and improved
cash flows in the short-run, and they in turn may result in higher earnings per share and stock price in the quarters that
immediately follow (Bettis et al., 1992).
Some analysts contend that an important source of user value is the firm's access to economies of scale and the unique
expertise that a large provider can deliver. Since providers are typically servicing many clients, they often achieve lower
unit costs than can any single company. Specialist providers can also afford to invest more in new technologies and
innovative practices than can many user enterprises (Alexander and Young, 1996).
Brand or reputational value can also improve when products and services are more competently delivered by providers
than by inside personnel. The South Eastern Pennsylvania Transit Authority (SEPTA), for instance, outsources its off-
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train ticket sales. Few riders realize that the employees behind the ticket glass work not for SEPTA but for a contracted
provider, and when the latter delivers high quality service to customers, the value accrues to SEPTA and its owners.
Firms enter sourcing agreements for strategic gain as well. Fresh value may come from an outsourcing contract if it
provides for good complementarity between a user's and a provider's capabilities; if it allows the user to stay abreast of
fast-changing technologies; and if it allows the user to draw on the results of capabilities it could not develop itself.
Company value can also be enhanced when management attention is more focused on strategic issues and less on daily
operational problems or organizational conflicts (Teece, 1986, Lei and Hitt, 1995, Alexander and Young, 1996, Bettis et
al., 1992, Penrose, 1959, Lacity and Hirschheim, 1993, Abraham and Taylor, 1996).
In addition, some studies do not have control groups, which makes it difficult to determine the causal relationship
between outsourcing and performance. For example, a study by Doherty and King (2017) examined the impact of
strategic outsourcing on firm performance but did not include a control group, making it difficult to determine the causal
effect of outsourcing on performance. The study by Beulen et al. (2015) examined the impact of outsourcing on
innovation in the Dutch healthcare industry, but did not include a control group of firms that did not outsource. A study by
Mol et al. (2009) found that outsourcing had a positive impact on firm performance, but did not include a control group.
Agrawal and Haleem (2013) used performance metrics, including cost efficiency, productivity, profitability, growth, cash
management, and market ratio, to analyze firm performance in ITO. The researchers conducted a quantitative empirical
study examining pre and post-financial data within firms (i.e., treatment group) that outsource IT processes, comparing
these 31 with similar companies (i.e., the control group) that did not outsource operations. Their study results indicated
that the treatment group typically demonstrated higher performance metrics compared to the control group for efficiency,
productivity, profitability, growth, market ratio, and firm value.
Conversely, Agrawal and Hall (2014) performed a similar empirical study within two industries: manufacturing and
service. The manufacturing businesses in the designated treatment group demonstrated greater efficiency in cost,
productivity, and cash management compared with the treatment group for the service companies. Business leaders who
employ effective outsourcing strategies are more likely to achieve better business performances compared to their
competitors who choose not to engage in such activities. However, managers may achieve different outsourcing results
depending on their industries, and business leaders who execute poor outsourcing strategies may probably yield
unfavorable results. Jørgensen (2014) performed a binary regression analysis on 785,325 small-scale IT software
outsourcing projects.
The researcher evaluated client and third-party provider attributes about collaboration, satisfaction, and skills to determine
when and why projects failed, as well as the contextual aspects during the initial decision-making process that might
increase the likelihood of project failure. Jørgensen argued that third-party vendor skills or capabilities, rather than low
price and vendor failure rates on prior engagements, were predictors of high risk of failure. Furthermore, the study results
indicated that adequate training, relevant skills, and experience were equally important for both the client and vendor to
mitigate project failure risk.
Control groups are an important aspect of true experimental designs. The presence of control groups allows researchers to
confirm that study results are due to the manipulation of independent variables (IVs) rather than extraneous variables.
Specifically, control groups comprise participants who are not exposed to the manipulated IV but are measured on the
study’s dependent variables (DVs).
Also, many studies focus solely on the cost savings that outsourcing can provide and do not consider other potential
benefits. For example, a study by Kedia and Mukherjee (2009) found that outsourcing can lead to improved innovation,
but many studies do not examine this aspect of outsourcing. A study by Domberger and Hall (1995) found that
outsourcing did not have a significant impact on the performance of UK local authorities, but did not consider other
potential benefits of outsourcing.
Among the motivations for outsourcing beside to cut costs are to build skills and competencies, and to reduce business
risks. Outsourcing decisions are also influenced by the number of acceptable providers and internal factors such as
unpredictable workload and low initial investments associated with high outsourcing levels.
Meanwhile, some studies focus on a specific geographic region, which limits the generalizability of their findings. A
study by Lacity et al. (2010) examined the impact of outsourcing on US firms, but did not consider firms in other
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countries Although the impact of strategic outsourcing on firm performance may vary across different industries, many
studies fail to account for industry-specific factors that may affect the relationship. For example, a study by Harun et al.
(2019) examined the impact of outsourcing on firm performance but did not account for industry-specific factors. A study
by Miozzo and Grimshaw (2006) examined the impact of outsourcing on innovation in the UK manufacturing industry,
but did not consider other industries.
The software sector was the first service sector to transfer significant activity to foreign locations, leading to the creation
of a critical mass of expertise and resources in concentrated locales, such as the city of Bangalore in India. The rapid
dissemination of the Internet, the transnational networks set up by immigrants in the US and liberalization of emerging
market
In addition to cost advantages similar to those offered by the manufacturing centers of East Asia, the ongoing outsourcing
of business services jobs to India, Malaysia, Philippines and South Africa among others is also due to the widespread
acceptance of English as a medium of education, business and communication in these countries; a common accounting
and legal system (at least in some of the countries), the latter based on the common law structure of UK and US; general
institutional compatibility and adaptability; the time-differential determined by geographical location leading to a 24/7
capability and overnight turnaround time; simpler logistics than in manufacturing, and a steady and copious supply of
technically savvy graduates.
India’s information technology enabled services (ITES) sector, the primary destination of business service outsourcing
from Western countries, now directly employs over 200,000 people with around $2.3 billion in exports, of which over
70% are to the US. While the sector is still small it is growing at a rate of 60% per annum.
4.2.2 SIAM and Firm performance
Mohammed et al (2022) examined how integration management techniques affected business performance in the United
Arab Emirates (UAE). A questionnaire used in the study was created using constructs and dimensions taken from the
literature review. Supply chain integration, supplier integration, customer integration, knowledge transfer with customers,
and managing knowledge transfer channels with customers are the components of integration management. Organizations
in the UAE were sent a questionnaire. Statistical analysis techniques, such as reliability tests, ANOVA, and correlation
analysis, were used to examine 94 responses. The findings demonstrate that integration management significantly
enhances organizational performance in the UAE. These practices significantly and positively affected the performance of
organizations. the best integration management practices among the various countries in the region are determined by a
thorough assessment of integration best practices.
Zhang et al (2022) examined the impact of supply chain integration on the operational performance of a Chinese-based
internet-based business. The study's primary data was gathered through a survey given to supply chain managers at the
named companies. once the survey has been distributed and the responses have been gathered. To ascertain the accuracy
of the research hypotheses, the structural equation modeling (SEM) method is used. The findings show that integrating
various supply chain components has a positive effect on operating performance, which enhances the financial
performance of the companies engaged in the integration process. Adopting sustainable supply chain management will
benefit a company because SCI boosts business performance. SCI, in other words, makes businesses more competitive.
The supply chain must be integrated into business operations by companies. Increasing communication and collaboration
with customers and suppliers is necessary to improve operational effectiveness and financial success. Organizations must
focus on SCI if they want to achieve different performance levels.
Instead of using SIAM, the study was restricted to SCI. Zhang et al (2022)) investigated the elements that are most crucial
for the implementation of SIAM in a multisourcing and multivendor environment. After conducting a structured literature
review, the findings were assessed through expert interview research. The study demonstrates that creating end-to-end
processes, ensuring open communication and collaboration, and creating and implementing a comprehensive governance
structure with distinct roles and responsibilities should be the primary focus of a successful transition from traditional
ITSM to SIAM. Thus, it is easy to identify critical success factors when performance is measured as a dependent variable.
The methodology of this study makes the limitations particularly clear. However, experience alone is used to map the
CSF to the phase model. Further consideration of the customer's point of view seems appropriate because only the IT
service provider/integrator viewpoint was taken into account.
34
In order to improve conceptual clarity regarding service integration across sectors, van Duijn et al. (2018) presented a
preliminary review of service integration across sectors in Europe using Minkman's Developmental Model for Integrated
Care (DMIC) as an analytical framework. The research methods included a review of the literature and a survey of actual
cases from across Europe (44 practices). This essay is based on a more thorough investigation released in 2016. The
research reveals that while social services and health care are frequently the focus of integration across sectors, other
arrangements are also frequently in place. The analysis demonstrates that integration can either be created for a specific
target group or for communities as a whole. Although often present, monitoring and evaluation systems for social service
integration are still in the early stages of development. According to the study, the DMIC can serve as a conceptual
framework for the examination of service integration across sectors. We need more in-depth case studies, though, as this
is only an exploratory study, to better understand the procedures involved in service integration across sectors. But the
scope of the literature's findings was limited; the majority of studies concentrated on the integration of health and social
services, and there were very few instances of integrated services involving one or more other sectors.
In their study, Kim and Kwak (2016) looked at the service integration data of 202 Korean businesses that manufacture
machinery and equipment. In order to remove common method bias, firm profitability is derived from secondary data. A
loss of opportunity for manufacturing improvements due to resource constraints, an increase in transaction costs, and an
inverted U-shape in the relationship between service integration and profitability as measured by the service-revenue ratio
are likely to be the causes of these issues. Additionally, outsourcing process operations and technical consulting greatly
enhance profitability. The study only considered profitability when examining company performance, disregarding all
other factors.
4.2.3 Offshoring and Firm Performance
Forte and Ribeiro (2019) evaluated the impact of offshoring on employment in the home country using a review of the
literature. Based on a sample of 14 manufacturing industry sectors for the years 1995 to 2009, the findings suggest that, in
the case of Portugal, offshoring has a small but positive effect on employment in the home country. This finding might
mean that offshoring contributes to the creation of more jobs than international relocation because higher sales are
brought on by productivity gains. Offshoring may present a chance to support and boost the competitiveness of businesses
in developed nations. In this way, offshoring helps create more jobs than it takes away from foreign countries in terms of
job relocation. The research did not cover other areas; it only examined industry sectors.
Olajumoke et al. (2018) evaluated the impact of outsourcing activities on the performance of the firm using the body of
existing literature. They did this by conducting a meta-analysis of 51 empirical findings from 24 articles. The study used a
detailed method by examining various outsourced operations in the manufacturing and service sectors. In order to increase
power, improve the effect size, and eliminate the uncertainty surrounding the effects of outsourcing activities on firm
performance measures, this paper combined the quantitative study data from several carefully chosen studies using meta-
analysis. According to the study, outsourcing improves firm performance. Only IT outsourcing, when compared to other
types of outsourcing, had a significant impact on firm performance when outsourcing functions were examined separately.
This may be explained by the fact that, in comparison to other types of outsourcing, IT outsourcing is less expensive for
the organization to implement. The study only looked at one industry, namely the clothing and footwear sector, so there
may be some generalizability problems.
Furthermore, the database's design makes it impossible to quantify captive offshoring for MSEs and to identify offshore
outsourcing among medium- and large-sized businesses, making it impossible to determine whether interactions between
these two types of businesses happen via the same internationalization strategy.
The goal of Mohiuddin and Su's (2013) study was to show how outsourcing of core and non-core activities and integrated
firm-level performance, which includes competitive, financial, strategic, and stakeholders' performance, are related. A
web-based questionnaire was used to gather empirical data from outsourced manufacturing small and medium-sized
enterprises (SMEs) in Quebec. For the purpose of determining the relationship between outsourcing and performance, a
linear regression analysis was conducted. The results demonstrate that insourcing (internalization) of core activities and
outsourcing of non-core activities both benefit a firm's overall performance. The results also show how manufacturing
SMEs can thrive in the current unstable business environment by improving their economic, social, and strategic
performances through offshore outsourcing. Since the manufacturing companies in this study are from various industries,
35
and the responses varied depending on the kind of outsourcing done for jobs with various levels of specificity, the results
cannot be applied to the entire outsourcing population after accounting for these response variations. Another drawback is
the use of a 5-point Likert scale to evaluate the performance of some variables.
Bertrand (2011) investigated how offshore outsourcing affected a company's ability to export. The study demonstrates
that offshore outsourcing aids businesses in increasing their exports by drawing on the theories of global business, the
resource-based perspective, and transaction cost economics. Their production costs could go down, and their flexibility
might increase. Additionally, it might give them access to fresh materials and market knowledge. The impact of offshore
outsourcing, however, depends on the resources and capacity of businesses to oversee a global network of suppliers and
assimilate foreign expertise.
4.2.4 Multi-sourcing and Firm performance
In this study by O'Connor et al. (2022), researchers looked at how multi-sourcing can affect management control use
when there are different buyer-supplier power dependencies. It took advantage of earlier research to create a conceptual
framework that illustrates how multi-sourcing can allow buyers to use cost management and performance management
controls in different ways depending on the types of buyer-supplier power dependencies. The framework is then
illustrated using case studies of three electronic product manufacturers, leading to empirically testable hypotheses about
when multi-sourcing may enable cost management controls, performance management controls, or both types of control.
The evidence shows how crucial it is to take into account several interorganizational design options at once when
researching management controls in supply chains. The also emphasize how multi-sourcing might assist supply chains in
promoting non-financial objectives, such as those connected to social and environmental activities. The study prioritized
comparing concepts over demonstrating relationships.
Baidoo-Baiden (2021) to conduct a study in order to compare the advantages of multiple and single sourcing approaches.
at Takoradi Technical University In-depth interviews were used in the study's qualitative research techniques to develop a
workable strategy for this particular research. The methodology used in this study included interactive interviews, but it
was also a systematic and exacting process that included in-depth face-to-face interviews with numerous respondents,
watching processes in action, using documentation, and closely examining archival records. The results supported the
assertions regarding the expanding significance of the role that procurement is playing in the expansion of organizations.
It was advised to combine both multiple sourcing strategies. The use of multiple sources of supply is more advantageous
in high-risk situations like volatile economic conditions and erratic labor relations. The study did not link multiple sources
of supply to performance; it only highlighted the significance of the practice.
Sani (2020) evaluated the impact of multiple and single sourcing strategies for international procurement on the
effectiveness of the organization. The study focuses on the overseas purchases made by Mesfin Industrial engineering plc.
Evaluation of their sourcing strategies' justifications is the goal. The primary information was gathered through
questionnaires and semi-structured interviewing guides, and a descriptive and explanatory research design was used to use
both primary and secondary data. Data were analyzed using correlation and regression techniques after 27 questionnaires
were given to Mesfin supply chain managers in industrial engineering. Thus, the results of the analysis supported the
existence of a positive correlation between the independent variables multisorucing and organizational performance.
Kimetto, Ojino, and Ayoo (2019) examined the ways in which businesses can implement a strategic sourcing solution to
increase performance while lowering costs. The main focus of this study was on how strategic sourcing affected the
Acacia Premier Hotel in Kisumu's organizational performance. Descriptive statistics and a case study research design
were both used in the study. Due to the small size of the population, which consisted of the 48 employees of the Acacia
Premier Hotel, the study used a census-style approach and included the entire population. Questionnaires were used to
gather data, and secondary data came from records. With the aid of descriptive statistics, data was analyzed. The results
demonstrate that multiple sourcing enables the accomplishment of organizational goals within the appropriate time
frames, improving performance; however, multiple sourcing has the drawback of inconsistency, which lowers satisfaction
and performance. The sample size of 46 respondents, however, was insufficient to be considered representative.
Furthermore, the study was conducted for a single company. Still, the conclusions could not be drawn from the data.
36
4.2.5 Strategic outsourcing, speed of service delivery and Firm performance
Igwe (2021)'s study was primarily concerned with how outsourcing decisions affected the productivity of a few Nigerian
oil companies in Port Harcourt. The study's goal is to determine the impact of outsourcing decisions on businesses'
operational performance (cost-cutting, innovation, and core competencies) (operational efficiency, service quality and
customer satisfaction). The study was conducted among the managers of Nigeria's top fourteen (14) oil marketing firms.
A total of 156 people make up the target population. Using the Taro Yamene Formula at 112, the sample size was
established. Simple percent and Pearson Moment Correlation Analysis were used to analyze the survey data. The results
showed that there is a significant and favorable relationship between innovation and service quality. Cost reduction and
operational effectiveness have a significant and favorable relationship. Customer satisfaction and core competence have a
positive and significant relationship. The study came to the conclusion that a company must evaluate the justifications for
outsourcing because the right decision will strengthen internal resources and increase operational effectiveness. In order to
lower operational costs, the study therefore advised businesses to outsource a portion of their operations. Therefore,
outsourcing some of the work will help to lower overhead costs, which will increase their profitability. Correlation
analysis, which was used in the study, does not demonstrate cause and effect. Additionally, performance missed some
crucial metrics like competitive advantage.
Asatiani, Penttinen, and Kumar (2019) conducted an empirical study using survey data collected from 337 small and
medium-sized businesses to evaluate the impact of nine motivation items on outsourcing decision. The study found that a
higher degree of outsourcing is associated with cost reduction, a focus on core competencies, and improvements to
business/processes; however, interestingly, access to expertise is negatively correlated with the degree of outsourcing.
According to this finding, businesses that outsource primarily to acquire outside expertise don't outsource many processes
within a single business function. The study only used the accounting industry as the empirical setting. Although the
accounting industry provides a relatively clean and controlled study environment, additional research could examine the
relationship between outsourcing motivations and the level of outsourcing in a wider context.
4.2.4 Strategic outsourcing, Competitive intensity and Firm performance
In thier paper, Shirkhodaie Sani and Aghbolagh's ( 2021) sought to investigate how intense industry competition affected
brand performance, with marketing competencies acting as a mediator along with market-focused learning and
organizational innovation. A questionnaire was used to survey the top firms listed on the Tehran Stock Exchange
responded. The said study used descriptive and inferential statistics to analyze the data. The test statistic T was used to
determine the significant path coefficient. The findings support all hypotheses and demonstrate that the level of industry
competition positively and significantly affects brand performance. In order to improve brand performance, it is therefore
better for firms to develop their marketing and market-focused learning capabilities rather than organizational innovation.
Performance, however, was assessed using financial information.
The goal of the study by Onditi et al. (2020) was to determine how competitive intensity affected the relationship between
market orientation and the performance of private security companies in Kenya. The chief executive officer of the
companies or the marketing managers of the private security firms served as the principal informants from whom data
was gathered. Market-based View was the study's theoretical vantage point. In a cross-sectional census study, the study
focused on 39 companies that were members of the Kenya Security Industry Association, and 37 companies took part in
the study. A semi-structured questionnaire was used to collect data. Regression analysis results showed that market
orientation had a favorable and significant impact on the nonfinancial and financial performance of Kenya's private
security companies. The findings also showed that competitive intensity, but not financial performance, moderated the
relationship between market orientation and non-financial performance. The more fiercely SMEs compete, the better they
will perform internationally. This demonstrates that for the internationalization of SMEs, the market's level of competition
must be higher in order for SMEs to develop and perform better. In order to survive in the international market, SMEs are
forced to respond to consumer demand and personal preference with minimum price guarantees, which, to some extent,
raises consumer awareness of new products and raises local consumers' price assurance. This builds the enterprise's
reputation and image in the local market and ensures its success in the international market. It also advised management
of businesses to devote time to fostering a culture of market orientation across all divisions of their businesses. However,
only sales and customer satisfaction are used to gauge a company's performance.
37
Cao et al. (2018) evaluated the factors that affect international performance and the degree of internationalization. In this
paper, the analysis introduced the idea of competition intensity and examine the effects of competition intensity on
international performance and the degree of internationalization by examining documents. According to the findings,
there is a positive correlation between SMEs' performance in international markets and the level of competition they face,
but a negative correlation between these two variables. Customers will be able to compare prices due to the worldwide
marketplace and price guarantees in industries that are fiercely competitive. If SMEs are able to seize this unique chance,
they can use the intense market competition to propel business growth, maintain their footing in international markets, and
build a solid foundation for quality performance. First and foremost, SMEs must keep costs under control, lower prices,
and create the impression that their goods are more affordable and of higher quality to foreign customers if they hope to
survive in the cutthroat international market. Even though the study used literature that couldn't respond to qualitative
questions, it was focused on international performance.
.
4.3 Proposed Theoretical Model
Theoretical model is imperative in helping to reveal the relationship between independent variables, moderating variables,
mediating variables and dependent variable. In the case of this independent study, a theoretical model was proposed that
illustrated the relationship between strategic alignment and customer satisfaction. This relationship is demonstrated in a
chart marked as Figure 5.1.
38
Proposed Theoretical Model
Mediating variable
Speed of service delivery

Independent variable
• Core competencies
Strategic outsourcing
Dependent variable
Firm performance
• Firm efficiency
Service Integration and Management • Firm profitability
(SIAM)
• Designing end-to-end processes
Ho1 • Competitive advantage
• Governance structure • Customer satisfaction
• Communication & collaboration • Employee productivity
• Competencies
Offshore outsourcing
• Coordination competency
• Relationship development Ho2
• Relationship design
• Organizational identification
Multi-sourcing
• Selection & Segmentation Ho3
• Onboarding and Information
Management
• Performance Management
• Supplier Development
• Relationship Management
Moderating variable
competitive intensity
• Predictability of a competitors’ market activity
• Hostility of a business’ s key competitors
• Breadth of key competitors’ activities
Figure 5.1: Proposed Conceptual Model
39
Source: Author (2023)
In accordance with review of conceptual, theoretical and empirical literature, the paper suggested a theoretical model
which is important for explaining strategic outsourcing as a determinant of firm performance. The paper proposes that
strategic outsourcing is related to firm performance and this relationship is mediated by speed of service delivery while it
moderated by competitive intensity. The reviewed literature conceptual literature, theoretical literature and empirical
literature helped extract the appropriate measures of each variable. Importantly, the RBT was useful in highlighting the
measures of firm performance as firm efficiency, firm profitability, competitive advantage, and customer satisfaction and
employee productivity. This was supported by the relevant conceptual literature and empirical literature. Meanwhile the
Transaction Cost Economics Theory while being supported by associated conceptual literature and empirical literature
highlights measures of strategic outsourcing as; service integration and management, offshore outsourcing, and multi-
sourcing. The literature show that core competencies are used to measure speed of service delivery while competitive
intensity is measured by; predictability of a competitors’ market activity, hostility of a business’ s key competitors, and
breadth of key competitors’ activities.
5.0Conclusion
The relationship between strategic outsourcing and firm performance is assessed in this independent study. In accordance
with the reviewed literature, this paper concludes that strategic outsourcing is related to firm performance and this
relationship is mediated by speed of service delivery while it moderated by competitive intensity. The study reveals that
while strategic outsourcing is measured in terms of; service integration and management, offshore outsourcing, and multi-
sourcing, the measures of firm performance are; firm efficiency, firm profitability, competitive advantage, customer
satisfaction and employee productivity.
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Strategic Outsourcing and Firm Performance: A Review of Literature

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Strategic Outsourcing and Firm

3.0 Conceptual Literature

3.1.1Perspectives of Strategic outsourcing

3.1.3 Adoption and Outcomes of Strategic outsourcing in Strategic Management

3.2 Historical Background of Firm Performance

3.2.1 The Concept of Firm Performance

Proposed Theoretical Model

Speed of service delivery

Figure 5.1: Proposed Conceptual Model

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