The relationship between the degree of offshoring and financial performance in Australia: effects of strategy, governance modes, absorptive capacity, and antecedents of offshoring

Organisations have vigorously pursued opportunities for profitability and growth through offshoring. Yet, research evidence on the performance benefits of offshoring activities has been contradictory. Moreover, the contradiction in outcomes can be traced to the complex nature of the offshoring process and the many aspects that may influence the relationship between offshoring and performance. This research develops and tests a comprehensive framework to explain the relationship between offshoring and performance improvement. Specifically, it addresses how the nature of tasks, antecedents of offshoring (i.e. characteristics of organisations which offshore), offshoring strategy (i.e. what drives organisations to offshore), offshoring governance modes (i.e. how to govern the offshoring process) and organisational absorptive capacity (i.e. how organisations’ can capitalise on new knowledge) affect the outcomes of offshoring. Using partial least squared structural equation modelling (PLS-SEM) analysis, the empirical findings of 77 Australian small-to-medium organisations (SMOs) confirm that: (1) Implementing offshoring as a viable efficiency-enhancing and/or growth strategy has a significant direct positive effect on performance improvement; (2) However, the implementation of offshoring as a cost-reduction strategy has a negative effect on the relationship between the degree of offshoring high-value added tasks and long- term performance improvement; (3) Using a captive governance mode is more effective in offshoring high value-added tasks, while third party offshoring is more effective in offshoring standardized tasks; (4) An organisation’s absorptive capacity or the same organisation’s ability to capitalise on knowledge gained has a positive influence on the relationship between the degree of offshoring in high-value-added tasks and performance improvement. These results suggest that managers and policy makers need to rethink the level of their offshoring engagement, strategic choices, knowledge absorptive capacity and governance modes in order to successfully implement offshoring.