TY - JOUR
T1 - Shareholder value implications of service failures in triads
T2 - The case of customer information security breaches
AU - Modi, Sachin B.
AU - Wiles, Michael
AU - Mishra, Saurabh
N1 - Funding Information:
All authors contributed equally to the paper. The third author acknowledges the financial assistance provided by the Social Sciences and Humanities Research Council (SSHRC) of Canada (Grant # 410-2011-1801 ) for this research.
Publisher Copyright:
© 2014 Elsevier B.V.All rights reserved.
PY - 2015/5/1
Y1 - 2015/5/1
N2 - The rise in front-end service outsourcing in recent years, despite its advantages, has also exposed buyer firms to unique challenges. One of the most salient risks for buyer firms in service triads is service failure due to the service provider. Indeed such service failures may be more costly for firms due to the greater relational and operational costs that may arise from the presence of the third-party provider. Yet, neither the services literature nor extant operations literature on service triads has paid much attention to the financial consequences to the buyer firm - i.e., service risks - of such service failures in triads. To fill this gap, we investigate the financial penalty of service failures due to the service provider using the event study methodology and a sample of 146 customer information security breaches as our empirical context. Analysis of the abnormal returns reveals that service failures due to the front-end service provider lead to greater shareholder losses than such failures due to the buyer firm. This provides important new insight into the financial risks arising from outsourcing front-end services. Further, we investigate the ability of the buyer firm's employee and financial resources to temper these shareholder losses. We find that buyer firm employee productivity can moderate the greater financial penalty associated with such triadic service failures but that buyer firm leverage tends to not have such a mitigating effect. This provides new guidance for theory and practice regarding how buyer firms can position themselves to buffer the financial risks arising from service failures due to front-end service providers.
AB - The rise in front-end service outsourcing in recent years, despite its advantages, has also exposed buyer firms to unique challenges. One of the most salient risks for buyer firms in service triads is service failure due to the service provider. Indeed such service failures may be more costly for firms due to the greater relational and operational costs that may arise from the presence of the third-party provider. Yet, neither the services literature nor extant operations literature on service triads has paid much attention to the financial consequences to the buyer firm - i.e., service risks - of such service failures in triads. To fill this gap, we investigate the financial penalty of service failures due to the service provider using the event study methodology and a sample of 146 customer information security breaches as our empirical context. Analysis of the abnormal returns reveals that service failures due to the front-end service provider lead to greater shareholder losses than such failures due to the buyer firm. This provides important new insight into the financial risks arising from outsourcing front-end services. Further, we investigate the ability of the buyer firm's employee and financial resources to temper these shareholder losses. We find that buyer firm employee productivity can moderate the greater financial penalty associated with such triadic service failures but that buyer firm leverage tends to not have such a mitigating effect. This provides new guidance for theory and practice regarding how buyer firms can position themselves to buffer the financial risks arising from service failures due to front-end service providers.
KW - Event study
KW - Information security breach
KW - Service recovery
KW - Service triads
KW - Shareholder value
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U2 - 10.1016/j.jom.2014.10.003
DO - 10.1016/j.jom.2014.10.003
M3 - Article
AN - SCOPUS:84939959458
SN - 0272-6963
VL - 35
SP - 21
EP - 39
JO - Journal of Operations Management
JF - Journal of Operations Management
ER -