Shareholder value implications of service failures in triads: The case of customer information security breaches

Sachin B. Modi, Michael Wiles, Saurabh Mishra

Research output: Contribution to journalArticle

25 Citations (Scopus)

Abstract

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.

Original languageEnglish (US)
Pages (from-to)21-39
Number of pages19
JournalJournal of Operations Management
Volume35
DOIs
StatePublished - May 1 2015

Fingerprint

Shareholders
Security of data
Outsourcing
Personnel
Productivity
Shareholder value
Triad
Information security
Service failure
Customer information
Breach
Buyers
Costs
Service provider
Front-end

Keywords

  • Event study
  • Information security breach
  • Service recovery
  • Service triads
  • Shareholder value

ASJC Scopus subject areas

  • Industrial and Manufacturing Engineering
  • Computer Science Applications
  • Management Science and Operations Research
  • Strategy and Management

Cite this

Shareholder value implications of service failures in triads : The case of customer information security breaches. / Modi, Sachin B.; Wiles, Michael; Mishra, Saurabh.

In: Journal of Operations Management, Vol. 35, 01.05.2015, p. 21-39.

Research output: Contribution to journalArticle

@article{0396b72f19a34d03b869c9db5f71a873,
title = "Shareholder value implications of service failures in triads: The case of customer information security breaches",
abstract = "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.",
keywords = "Event study, Information security breach, Service recovery, Service triads, Shareholder value",
author = "Modi, {Sachin B.} and Michael Wiles and Saurabh Mishra",
year = "2015",
month = "5",
day = "1",
doi = "10.1016/j.jom.2014.10.003",
language = "English (US)",
volume = "35",
pages = "21--39",
journal = "Journal of Operations Management",
issn = "0272-6963",
publisher = "Elsevier",

}

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

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

UR - http://www.scopus.com/inward/record.url?scp=84939959458&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84939959458&partnerID=8YFLogxK

U2 - 10.1016/j.jom.2014.10.003

DO - 10.1016/j.jom.2014.10.003

M3 - Article

AN - SCOPUS:84939959458

VL - 35

SP - 21

EP - 39

JO - Journal of Operations Management

JF - Journal of Operations Management

SN - 0272-6963

ER -