Outsourcing under moral hazard as an instrument of cost leadership: Empirical study of the Zimbabwean mining sector

Abstract

This study investigates the role played by contractual governance and relational adaptation in safeguarding against the negative effect on cost competitiveness of internal moral hazard and external moral hazard in outsourcing transactions. The main attributes of outsourcing transactions from a transactions cost economics (TCE) perspective were incorporated into the study. These are asset specificity, performance ambiguity and environmental risk (Williamson, 2008). The study contributes empirical evidence from firms operating in the mining industry in Zimbabwe on the subject of outsourcing from a TCE and Principal Agent perspective. Methodologically the study makes a contribution by utilising tools and packages that have not been prevalent in the study of outsourcing in Africa. Data is collected by way of a survey for analysis the power of structural equation modelling (SEM) is harnessed to evaluate the mediation potency of the governance mechanisms against the negative effects of double moral hazard on the cost competitiveness of the firms. Practically, the study provides insight for management of firms operating in the mining industry in Zimbabwe on the areas where the most attention is required so that the full cost saving potential of outsourcing is harnessed as intended. In answering the overall research question, the study found that while the use of both relational adaptation and contractual governance improves cost competitiveness of firms operating in the mining industry in Zimbabwe, only relational adaptation provides significant full mediation against double moral hazard. Asset specificity turned out to be the strongest predictor of the emergence of double moral hazard in outsourcing transactions embarked upon by these firms. Performance ambiguity has no significant influence at all while environmental risk weakly contributes to the emergence of internal moral hazard.