Hidden Costs and the Role of Modularity: A Study on Offshoring Process Performance

This paper addresses estimation errors in strategic decision-making processes due to hidden costs. While previous research has investigated the antecedents of hidden costs, this paper investigates performance consequences. Using unique data on 221 offshoring implementations, it is argued that the inability to effectively estimate the costs of implementing an activity in a foreign location has a negative impact on the process performance of that activity. Performance is deterred as operations are likely to be disrupted by opportunity costs and managerial responses. However, this relationship is mitigated by the degree of modularity in the activity as it reduces the need for costly coordination in offshoring. This paper contributes to research on offshoring and strategic decision-making by emphasizing the importance of organizational design and of estimating the costs of internal organizational change.