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

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.

[1]  R B Chase,et al.  Where does the customer fit in a service operation? , 1978, Harvard business review.

[2]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[3]  E. Fama.  EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK* , 1970 .

[4]  H. Levy,et al.  Sentiment and Stock Prices: The Case of Aviation Disasters , 2008 .

[5]  Peter Wright,et al.  AGENCY CONFLICT AND CORPORATE STRATEGY: THE EFFECT OF DIVESTMENT ON CORPORATE VALUE , 1997 .

[6]  A. Roth,et al.  The Influence of Service Orientation on B2B e-Service Capabilities: An Empirical Investigation , 2012 .

[7]  Sridhar Seshadri,et al.  Outsourcing of front-end business processes: Quality, information, and customer contact , 2008 .

[8]  J. B. Ramsey,et al.  Tests for Specification Errors in Classical Linear Least‐Squares Regression Analysis , 1969 .

[9]  D. Collier.  The service/quality solution : using service management to gain competitive advantage , 1994 .

[10]  D. Daryl Wyckoff,et al.  Management of service operations: Text, cases, and readings , 1978 .

[11]  Finn Wynstra,et al.  Effective buyer‐supplier interaction patterns in ongoing service exchange , 2009 .

[12]  K. B. Hendricks,et al.  The Effect of Operational Slack, Diversification, and Vertical Relatedness on the Stock Market Reaction to Supply Chain Disruptions , 2009 .

[13]  Gordon E. Greenley,et al.  A Comparison of Slack Resources in High and Low Performing British Companies , 1998 .

[14]  Ruth N. Bolton,et al.  A Model of Customer Satisfaction with Service Encounters Involving Failure and Recovery , 1999 .

[15]  Kirk R. Karwan,et al.  The Effects of Severity of Failure and Customer Loyalty on Service Recovery Strategies , 2004 .

[16]  James J. Heckman,et al.  Using matching, instrumental variables and control functions to estimate economic choice models , 2004 .

[17]  Thomas Y. Choi,et al.  TRIADS IN SERVICES OUTSOURCING: BRIDGE, BRIDGE DECAY AND BRIDGE TRANSFER , 2009 .

[18]  Jan B. Heide,et al.  Transaction Cost Analysis: Past, Present, and Future Applications , 1997 .

[19]  Michael A. Wiles,et al.  The worth of product placement in successful films : an event study analysis , 2009 .

[20]  Gary W. Loveman,et al.  Putting the Service-Profit Chain to Work , 1994 .

[21]  J. Jaffe.  Special Information and Insider Trading , 1974 .

[22]  Sri S. Sridhar,et al.  Incomplete Information, Task Assignment, and Managerial Control Systems , 1997 .

[23]  M. Weisbach,et al.  The Success of Acquisitions: Evidence from Disvestitures , 1990 .

[24]  Rita Gunther McGrath,et al.  IMPROVING LABOR PRODUCTIVITY: HUMAN RESOURCE MANAGEMENT POLICIES DO MATTER , 1996 .

[25]  Minghua Jiang,et al.  Quantifying the Dynamic Effects of Service Recovery on Customer Satisfaction , 2013 .

[26]  Erik Stafford,et al.  Managerial Decisions and Long-Term Stock Price Performance , 1999 .

[27]  Amar Cheema,et al.  Data collection in a flat world: the strengths and weaknesses of mechanical turk samples , 2013 .

[28]  Sachin B. Modi,et al.  The relationship between information technology capability, inventory efficiency, and shareholder wealth: : A firm-level empirical analysis , 2013 .

[29]  Business service triads : a new area for service research , 2010 .

[30]  Chia-Chi Chang,et al.  Alleviating the negative impact of delayed recovery: process- versus outcome-focused explanations , 2013 .

[31]  Michael A. Lapré.  Reducing Customer Dissatisfaction: How Important is Learning to Reduce Service Failure? , 2006 .

[32]  Janis L. Miller,et al.  Service recovery: a framework and empirical investigation , 2000 .

[33]  Deborah L. Kellogg,et al.  The relationship between service customers' quality assurance behaviors, satisfaction, and effort: A cost of quality perspective , 1997 .

[34]  Z. Justin Ren,et al.  Call Center Outsourcing: Coordinating Staffing Level and Service Quality , 2008, Manag. Sci..

[35]  G. W. Walster,et al.  New directions in equity research. , 1973 .

[36]  Celso Augusto de Matos,et al.  Service Recovery Paradox: A Meta-Analysis , 2007 .

[37]  Julie M. Hays,et al.  THE MARKET SHARE IMPACT OF SERVICE FAILURES , 1999 .

[38]  W. C. Benton,et al.  Research opportunities in purchasing and supply management , 2012 .

[39]  Luigi Zingales.  Survival of the Fittest or the Fattest? Exit and Financing in the Trucking Industry , 1998 .

[40]  W. Sasser,et al.  The profitable art of service recovery. , 1990, Harvard business review.

[41]  Michael A. Lapré.  Reducing Customer Dissatisfaction: How Important is Learning to Reduce Service Failure?: Reducing Customer Dissatisfaction , 2011 .

[42]  Michael A. McCollough,et al.  An Empirical Investigation of Customer Satisfaction after Service Failure and Recovery , 2000 .

[43]  David P. Lepak,et al.  Human Resource Management, Manufacturing Strategy, and Firm Performance , 1996 .

[44]  Kai H. Lim,et al.  Web strategies to promote internet shopping: is cultural-customization needed? , 2009 .

[45]  Rohit Verma,et al.  Research opportunities in service process design , 2002 .

[46]  Steven D. Caldwell,et al.  Beyond change management: a multilevel investigation of contextual and personal influences on employees' commitment to change. , 2007, The Journal of applied psychology.

[47]  D. Crowther.  Creating Shareholder Value , 2003 .

[48]  R. Klassen,et al.  The impact of supply chain structure on the use of supplier socially responsible practices , 2010 .

[49]  G. Mandelker.  Risk and return: The case of merging firms , 1974 .

[50]  A. Mackinlay,et al.  Event Studies in Economics and Finance , 1997 .

[51]  Peggy M. Lee.  What's in a name.com?: The effects of ‘.com’ name changes on stock prices and trading activity , 2001 .

[52]  Jerold B. Warner,et al.  Using daily stock returns: The case of event studies , 1985 .

[53]  Stanley E. Griffis,et al.  Failure to deliver? Linking online order fulfillment glitches with future purchase behavior , 2011 .

[54]  Kee-Hong Bae,et al.  Employee Treatment and Firm Leverage: A Test of the Stakeholder Theory of Capital Structure , 2010 .

[55]  Frank Zhang,et al.  Information Uncertainty and Stock Returns , 2004 .

[56]  J. Iwaarden,et al.  Monitoring in service triads consisting of buyers, subcontractors and end customers , 2011 .

[57]  Kalyan Singhal,et al.  Opportunities for developing the science of operations and supply‐chain management , 2012 .

[58]  Saurabh Mishra,et al.  What drives financial performance–resource efficiency or resource slack?: Evidence from U.S. Based Manufacturing Firms from 1991 to 2006 , 2011 .

[59]  Cornelia Dröge,et al.  Encounter Satisfaction in E-tailing: Are the Relationships of Order Fulfillment Service Quality with its Antecedents and Consequences Moderated by Historical Satisfaction? , 2014, Decis. Sci..

[60]  James Guthrie,et al.  HUMAN RESOURCE MANAGEMENT AND LABOR PRODUCTIVITY: DOES INDUSTRY MATTER? , 2005 .

[61]  Morgan Swink,et al.  Six Sigma adoption: Operating performance impacts and contextual drivers of success , 2012 .

[62]  Arvind Malhotra,et al.  Evaluating Customer Information Breaches as Service Failures: An Event Study Approach , 2011 .

[63]  D. Rubin,et al.  The central role of the propensity score in observational studies for causal effects , 1983 .

[64]  Huseyin Cavusoglu,et al.  The Effect of Internet Security Breach Announcements on Market Value: Capital Market Reactions for Breached Firms and Internet Security Developers , 2004, Int. J. Electron. Commer..

[65]  Zhen Zhu,et al.  A Mathematical Model of Service Failure and Recovery Strategies , 2004, Decis. Sci..

[66]  T. Schoenherr.  Outsourcing decisions in global supply chains: an exploratory multi-country survey , 2010 .

[67]  Sriram Dasu,et al.  Human issues in service design , 2002 .

[68]  V. Martinez,et al.  Managing triads in a military avionics service maintenance network in Taiwan , 2010 .

[69]  Abagail McWilliams,et al.  Event Studies In Management Research: Theoretical And Empirical Issues , 1997 .

[70]  Stefan Michel,et al.  Three outcomes of service recovery: Customer recovery, process recovery and employee recovery , 2008 .

[71]  Mark M. Carhart.  On Persistence in Mutual Fund Performance , 1997 .

[72]  Julie M. Hays,et al.  A preliminary investigation of the relationships between employee motivation/vision, service learning, and perceived service quality , 2001 .

[73]  Jerold B. Warner,et al.  MEASURING SECURITY PRICE PERFORMANCE , 1980 .

[74]  Kevin B. Hendricks,et al.  The effect of supply chain glitches on shareholder wealth , 2003 .

[75]  Jan-Benedict E. M. Steenkamp,et al.  The Effect of CRM Outsourcing on Shareholder Value: A Contingency Perspective , 2012, Manag. Sci..

[76]  A. Roth,et al.  INSIGHTS INTO SERVICE OPERATIONS MANAGEMENT: A RESEARCH AGENDA , 2003 .

[77]  F. Wynstra,et al.  Service triads: A research agenda for buyer–supplier–customer triads in business services , 2015 .

[78]  M. C. Jensen,et al.  Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers , 1999 .

[79]  Thomas Y. Choi,et al.  Supplier–supplier relationships in the buyer–supplier triad: Building theories from eight case studies , 2005 .

[80]  S. P. Kothari,et al.  Econometrics of Event Studies , 2007 .

[81]  Ravi Subramanian,et al.  An empirical investigation of environmental performance and the market value of the firm , 2010 .

[82]  Thomas Y. Choi,et al.  TRIADS IN SUPPLY NETWORKS: THEORIZING BUYER–SUPPLIER–SUPPLIER RELATIONSHIPS , 2009 .

[83]  David A. Tansik,et al.  The Customer Contact Model for Organization Design , 1983 .

[84]  Devi R. Gnyawali,et al.  Two's Company, Three's a Crowd? Triads in Cooperative-Competitive Networks , 2007 .

[85]  Jayant R. Kale,et al.  Corporate Capital Structure and the Characteristics of Suppliers and Customers , 2007 .

[86]  Shenyang Guo,et al.  Propensity Score Analysis: Statistical Methods and Applications , 2014 .

[87]  D. Rubin,et al.  Constructing a Control Group Using Multivariate Matched Sampling Methods That Incorporate the Propensity Score , 1985 .

[88]  O. Williamson,et al.  The mechanisms of governance , 1996 .

[89]  K. B. Hendricks,et al.  Quality awards and the market value of the firm: an empirical investigation , 1996 .

[90]  J. Traupmann,et al.  Equity: Theory and Research , 1978 .