The Interplay of Relational Capital and the Ease of Monitoring Systems as BPO Safeguards: Evidence from the Large Banking Industry in Indonesia

Investment in specific assets is prominent in empirical research on buyer-supplier relationships. Based on transaction cost economics (TCE) theory, organizations will invest in specific assets to enhance the value and benefit from the relationship while simultaneously minimizing transaction costs [1]. Business process outsourcing between banks and their suppliers necessitates specific assets to achieve higher performance for both parties. These investments are committed to specific partners and have comparatively low or no value outside the relationship [2]. Banks may require their business process suppliers to invest in specialized services and procedures to meet their requirements [3]. Banks, as buyers, can select suitable suppliers and utilize their expertise as vital resources.

The Indonesian banking industry exhibits an intriguing phenomenon regarding the motivation of tier-two business process suppliers to mobilize specific investments to win tenders with their targeted bank clients. Procurement regulation in the Indonesian banking industry is governed by the Presidential Regulation of the Republic of Indonesia number 54 of 2010. It was stated that the tender process for goods and services at the central bank, state-owned commercial/shariah banks, nationally-owned private commercial/shariah banks, and local government-owned commercial/shariah banks is centralized and administered through an electronic procurement system.

Despite the possibility for banks to renew their procurement contracts with current suppliers, they must adhere to government regulations that mandate disseminating public procurement announcements through various means. The public disclosure of outsourcing tenders presents prospects for small and medium-sized tier-two suppliers to become bank suppliers. For tier-two suppliers, outsourcing transactions with nationalized banks can enhance their capabilities and competitiveness. Moreover, the establishment of BPO relationships with large-scale banks serves as a crucial catalyst for tier-two suppliers to secure larger value deals in the future [4-6].

Tier-two suppliers possess an equal opportunity as large-scale suppliers to become BPO suppliers, provided they allocate dedicated investments towards intangible assets. These assets encompass distinctive processes and procedures, and certified human resources possessing specialized skills and competencies. By doing so, tier-two suppliers can effectively secure BPO tenders with targeted bank clients. Furthermore, research in the banking industry, especially on the BPO setting between banks and their service providers, needs to be conducted in greater depth, as previous research has shown that the banking industry has a high level of asset specificity, as intangible specific assets play a crucial role in the achievement of organizational performance [3]. Specific assets are one of the factors that influence an organization’s decision to internalize or outsource transactions to the market [7].

According to the theory of transaction cost economics, it is proposed that transactions with a high degree of asset specificity should be carried out in the hierarchical organizational structure [6]. Despite the requirement for banks to possess highly specific assets, it is noteworthy that the banking industry is the largest buyer of outsourcing services other than the manufacturing industry [8]. Therefore, understanding how tier-two suppliers, as small suppliers, simultaneously attempt to secure their specific asset investments while also engaging in opportunistic behavior towards their large buyers is crucial for BPO relationships, specifically in the Indonesian banking industry.

Collaborative business process outsourcing between banks and their suppliers enables both parties to strengthen their market position and increase their customer base by combining respective resources and knowledge [9]. Both banks and their BPO suppliers seek to benefit from their collaboration. Nevertheless, opportunistic behavior, commonly referred to as self-interest seeking with guile [6], is pervasive in the BPO setting [10] due to the absence of a standard set of norms and institutions governing exchange partner behaviors [11]. For instance, buyers can unilaterally expand the scope of work for suppliers against prior agreements or unilaterally terminate contracts [10].

On the other hand, suppliers can act opportunistically by shirking responsibilities, underperforming on their promises, and providing poor-quality work to buyers [11]. However, a unique feature of opportunistic behavior by highly invested suppliers in the BPO setting is that it frequently involves actions that are not readily visible or easily detectable by buyers, such as cutting corners in service delivery, lowering quality standards, or manipulating performance metrics while appearing to meet contractual obligations [12]. A recent study found that tier-two suppliers may have few other potential buyers, mainly if their products are highly specialized or tailored to a specific industry; this limited market may encourage suppliers to act opportunistically without the fear of losing business [13]. Another study also revealed that tier-two suppliers may possess information that the bank does not, such as knowledge about the actual costs of providing the services or the quality, giving them an advantage in negotiations to obtain better terms or pricing [14]. Furthermore, in many cases, tier-two suppliers rely significantly on large buyers like banks for a substantial portion of their business. This power disparity can result in opportunistic behavior, as the supplier may feel compelled to extract more favorable terms or concessions from the bank [15].

To solve these challenges, the bank may create rigorous monitoring and performance measurement systems to guarantee that their suppliers satisfy contractual obligations, deliver quality products or services, and maintain a professional and ethical business relationship [16]. This monitoring system assists buyers in identifying and resolving any issues that may arise during their business relationship with suppliers [14]. So that buyers can establish specific performance metrics and key performance indicators (KPIs) that suppliers must satisfy. These metrics may include on-time delivery, product quality, lead times, and response times [11]. Buyers can objectively evaluate supplier performance by regularly tracking and measuring these metrics [16]. Furthermore, implementing a monitoring system also benefits suppliers by enabling them to assess and measure the quality and quantity of work they deliver, and adhere to agreed-upon timelines and contractual terms [16]. In addition to providing visibility into the buyer’s actions, the monitoring mechanism enables both parties to observe each other’s behaviors and decisions [14].

Despite the fact that monitoring can be a valuable tool for measuring performance, only some scholars have emphasized the limitations of monitoring system implementation as contractual governance. First, monitoring mechanisms rely on the availability of accurate and comprehensive data. Nevertheless, certain circumstances could arise where the data is missing, incomplete, or unreliable. The issue above can potentially restrict the monitoring effectiveness and result in incomplete or erroneous findings [14]. Second, monitoring mechanisms generate data and metrics, but human analysis is required for interpretation. Interpreting the data correctly and drawing meaningful conclusions can be challenging, mainly when dealing with complex or ambiguous situations. Misinterpretation or interpretative bias may result in erroneous conclusions or ineffective decision-making [11]. Third, monitoring mechanisms can occasionally have unintended consequences. For instance, people being monitored may alter their behavior to fit the norm, which may not accurately represent their true performance or behavior. As a result, this can lead to distortions and reduce the accuracy and efficacy of monitoring efforts [11, 17].

In light of the constraints associated with the monitoring mechanism, some researchers have suggested the adoption of a combined approach involving both monitoring mechanisms and relational governance within a BPO setting [4, 5, 18]. Relational governance, through the cultivation of trust and the exchange of shared values and norms, facilitates the recognition of the potential value in resource integration among partners. Thus, partners are inclined to prioritize the benefits of sustained collaboration over opportunistic actions aimed at immediate individual gains [16]. Furthermore, previous research has also identified several relational mechanisms, such as trust and norms of reciprocity, that secure certain asset investments [19]. However, trust primarily focuses only on the act of placing belief in the character and intentions of the other party, as well as depending on their ability to exhibit a trustworthy manner and fulfill their obligations. It has a narrower focus because it excludes other factors that contribute to the strength and value of a relationship [5, 20]. In addition to trust, Nahapiet and Ghoshal [21] argue that relational capital incorporates a broader array of resources and factors that contribute to the value and efficacy of a relationship. It provides a foundation for long-term partnerships, knowledge sharing, and collaborative advantage [4, 5].

Relational capital is one of three dimensions of social capital that refers to the trust, commitment, respect, and friendship that actors have developed with each other through a history of interactions [4, 21]. Through repeated transactions, buyers and suppliers have established and confirmed trustworthiness, friendship, and reciprocity norms. Once relational capital has been accumulated, decision-makers typically exhibit reduced anxiety regarding the potential occurrence of opportunistic behavior from their exchange partners. Thus, it is postulated that both firms will endeavor to engage in open communication and exhibit increased transparency in their behavior as an indication of solid trust in the outsourcing partnership [5].

The concept of relational capital refers to the favorable emotional reactions of both consumers and suppliers toward outsourcing contracts, which are established via trust, personal relationships, and recurrent interactions [20]. Thus, both firms have less incentive to engage in opportunistic behaviors, such as lying, cheating, and stealing, due to the potential negative impact on their reputation and the subsequent decrease in future repeat transactions [12]. Hence, a significant contribution of this study to the literature on strategic management is identifying relational capital as a potential safeguard against opportunistic behavior in highly specific investment settings.

Furthermore, the study proposed that the efficacy of relational capital in safeguarding will be enhanced in situations where the convenience of the buyers’ monitoring system is diminished. The ease of monitoring system has the potential to alter the moderating impact of relational capital on the relationship between suppliers’ specific investment and suppliers’ opportunistic behavior. It refers to the ease and difficulty with which a partner’s behavior and performance can be measured and evaluated systematically by its exchange partners [22]. When monitoring system ease is high, buyers are more likely to evaluate their relationship intensely [23]. Consequently, suppliers who possess significant levels of relational capital and invest in specific assets may exhibit an increase in opportunistic behavior due to a lack of independence from a highly accessible monitoring system. In contrast, when monitoring system ease is low, suppliers with high levels of relational capital may decrease their opportunistic behavior, as outsourcing relationships are valued for their return and their independence. Thus, another contribution of this research to the literature is to deepen one’s understanding of the ease of the buyer’s monitoring system, which is a crucial factor in establishing relational capital as a beneficial means of safeguarding against suppliers’ opportunistic behavior.

3.1 Sample and data collection

An empirical examination was conducted to assess the BPO setting in the banking sector, specifically focusing on the relationship between banks as buyers and their suppliers (contact center, security, telemarketing, cash in transit) in Indonesia. The study aimed to validate the hypotheses outlined in Figure 1. The selection of the BPO in the Indonesian banking industry as the research context was based on two main reasons. First, business process suppliers tend to invest in intangible specific assets (e.g., skilled and experienced workers, knowledge, know-how, and routines) to support their outsourcing relationship with banks [3, 39]. Previous studies have also discovered that business process suppliers can and do engage in opportunistic behavior [1, 10]. Therefore, examining conceptual propositions presented in the hypotheses is appropriate for analyzing business process outsourcing in the banking industry.

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Figure 1. The safeguarding role of relational capital: the ease of monitoring system as a boundary condition

Second, the decision was made to build a BPO setting with large-scale banks in Indonesia. These supply chains were sufficiently substantial to provide us with high statistical power [3, 9]. This empirical study examined the relationship between banks and their business process suppliers including contact centers, telemarketing, security, and cash in transit. Bank outsourcing managers or area managers were identified as the most suitable bank-level informants to provide information about a bank’s relationship with its business process suppliers. Moreover, the operational manager or division manager would be best suited to provide a report on the relationship between business process suppliers and banks. Additionally, two online surveys were conducted to match bank managers with business process suppliers.

For the survey of bank managers in Indonesia, questionnaires were sent to 482 bank outsourcing managers and bank area managers. A team of survey enumerators was employed to facilitate bank management’s completion and submission of the questionnaire. In addition, the enumerators requested that bank managers record their business process suppliers’ names, phone numbers, and addresses, including contact centers, telemarketing, security, and cash in transit. Furthermore, the banks’ managers expressed their conviction that only aggregate outcomes would be presented and emphasized the need to maintain the confidentiality of all collected data. In the end, from 482 bank managers, 103 valid questionnaires were received (21.3%).

A questionnaire was mailed to 713 operational and division managers employed at four business process firms that bank managers had previously referenced. In addition, each bank mandated that supplier managers complete a separate questionnaire. A total of 103 buyer-supplier pairs were obtained by aligning each survey with its respective outsourcing manager survey. Out of the 103 dyads examined, it was found that 5 banks were classified as state-owned companies, 39 were local government banks, 53 were national private banks, and 6 were joint venture banks.

Regarding the suppliers, there were 18 telemarketing service providers, 40 security service providers, 22 cash-in-transit service providers, and 23 contact center service providers. The dyadic data revealed that two participants contributed data for four variables, and an opportunity was available to validate the responses supplied. Harman’s one-factor test [40] was performed, wherein all variables were included in an exploratory factor analysis model. The issue of the common method bias did not emerge in this study, as the first factor accounted for 22% of the variance. Table 1 depicts a summary of the business process outsourcing relationships investigated. Additionally, the data indicates that the mean duration of the relationships between banks and business process suppliers was 6.8 years.

Table 1. Summary of business process outsourcing arrangements

3.2 Measures

An extensive literature review was conducted to facilitate the development of measures, and a structured questionnaire was utilized to assess the four constructs examined in our hypothesis. Additionally, the questionnaire was subjected to a pretest with banking practitioners and business process suppliers to enhance its content validity. Both banking practitioners and business process suppliers were given the same questionnaire to gather information regarding the specific asset investments made by business process suppliers. Furthermore, this study also assesses provider opportunism towards banks, the level of relational capital between the parties, perceptions about the ease of monitoring system, and performance.

The questionnaire items are included in Table 2. Existing scales were adapted to the present study context. Some were multi-item constructs measured on five-point Likert scales, whereas others consisted of single, open-ended objective questions requiring a simple numerical response. Furthermore, the data collection process employed a dyadic approach, wherein parallel questions were asked to both buyers and suppliers for each business process outsourcing relationship [6].

Six five-point Likert-type items were used to measure a supplier’s investment in intangible assets, such as employee training routines and technical skills [41]. The present study employed a set of eight indicators consisting of Likert-type items with a five-point scale to measure self-interest-seeking behavior [10]. Additionally, this study utilized three indicators consisting of five-point Likert-type items to evaluate the banks’ ability to effectively monitor each of their business process suppliers [42].

The study incorporated two covariate variables to investigate the possibility that other variables could explain the variance in business process suppliers’ opportunistic behavior. Furthermore, the duration of the relationships between banks and the business process suppliers were restricted. Finally, the size of the business process arrangement was measured. This is determined using the natural logarithm of the total number of outsourcing contracts signed between banks and their business process suppliers.

Table 2. Construct characteristics

Table 3. Descriptive statistics, reliability, inter-correlations, and AVEs of variables (degree symmetric value)

In this section, the major findings of the study, and the implications of the study are discussed to provide a valuable contribution to the future theoretical development and the management of business process outsourcing (BPO).

5.1 Major findings

Hypothesis 1 revealed a positive correlation between suppliers’ opportunistic behavior and their specific asset investments as seen in Table 4. Furthermore, in line with Hypothesis 2, it is suggested that the presence of buyers’ relational capital reduces the impact of suppliers’ specific asset investments on suppliers’ opportunistic behavior. The presence of relational capital significantly hinders the suppliers from engaging in opportunistic behavior, particularly when the suppliers have made big investments in specific assets. Additionally, it is suggested that the relational capital possessed by buyers has a controlling impact on the behavior of suppliers. However, this safeguarding influence is contingent upon the ease with which buyers can systematically monitor the activities and outcomes of suppliers. The decomposition of the significant interaction among the SSI, RSC, and MSE variables is demonstrated in Table 4.

Based on the data presented in Figure 2, it can be observed that suppliers have limitations in engaging in opportunistic behavior when their buyers encounter challenges in effectively monitoring their activities. Typically, an inverse relationship exists between the complexity and cost of a monitoring system and the likelihood of a buyer engaging in extensive and intrusive monitoring [33]. Additionally, Figure 2 demonstrates that as the system facilitates the buyers’ ability to monitor suppliers, there is an enhanced positive correlation between the suppliers’ specific asset investment and their opportunistic behavior. Hence, buyers are more likely to engage in extensive monitoring of suppliers when the monitoring system is easier for them. This monitoring system’s ease may diminish the relational capital’s safeguarding effects.

5.2 Theoretical implications

This study has made significant theoretical contributions to the relevant field. First, this study suggests that the presence of relational capital among buyers safeguards against suppliers engaging in opportunistic behavior. This finding aligns with the concept of close and personal relationships among actors, which serve as a deterrent for firms to engage in opportunistic behavior towards their partners [5, 20, 38]. As a result, the previously untested concept is that firms should avoid opportunistic behavior if it affects an economically beneficial relationship. Second, this study also addresses a specific scenario in which the safeguarding role of relational capital enables establishing an easy monitoring system, allowing the buyers to monitor the suppliers’ mobility and output efficiently.

Third, this study supports the concept that buyers’ relational capital serves as a safeguard against suppliers’ opportunistic behavior, but only in cases when buyers have limited ability to monitor their suppliers extensively. This conclusion provides further evidence that the ease of monitoring systems discourages opportunistic behavior by limiting the suppliers’ autonomy in selecting the means to achieve its goals and sending a signal of distrust [33]. As a result of excessive monitoring, the suppliers may assert their independence in unfavorable ways and act unreliable, confirming the buyers’ mistrust.

5.3 Practical implications

The research findings of the study provide several suggestions for effectively managing BPO relationships. First, relational capital can safeguard against suppliers’ opportunistic behavior, particularly when the supplier has invested in a specific asset. The safeguarding effects are applicable in cases where the buyers encounter challenges in effectively and efficiently monitoring the suppliers. Consequently, it is advisable for buyers to employ caution or be wise in their monitoring practices in order to decrease the potential for suppliers to engage in opportunistic behavior. In essence, when the ease of monitoring is high, it is advisable to minimize the inclination to closely observe all aspects since this may lead to opportunistic behavior among parties.

Second, within the scope of the study, the researchers facilitated the practice of BPO between banks and their respective business process suppliers in Indonesia. The financial services sector is widely acknowledged as the primary catalyst for economic growth. Firms engaged in the financial services industry contribute value to people’s lives by providing various intangible outputs referred to as services [9].

Consequently, supply chain management is increasingly becoming a pivotal concern due to its potential to confer a competitive advantage upon firms. According to [9], banks have two distinct value chains: digital value chain and physical value chain. Additionally, banks commonly maintain relationships with two suppliers. The first consists of government or private organizations, financial institutions, groups, and individuals providing capital resources or assets, and the second comprises human resources [46]. Most banks define their competitive advantage as outstanding customer relations and service [3]. Given that these two elements are interpersonal and based on direct interactions between individuals, the bank will pursue a strategy focusing on human resources with the expertise, skills, and ability to run front-office, middle-office, and back-office business process services [39].

The financial service industry, including the banking industry, has a high level of asset specificity because specific intangible assets play a crucial role in organizational performance [47]. Furthermore, organizational decisions regarding whether to internalize or outsource transactions are influenced in part by specific assets [7]. The economic theory of transaction costs suggests that transactions with high asset specificity are internalized in hierarchies [6].

Although banks require specific assets with a high specificity level, surprisingly, Indonesia’s banking industry is now the largest buyer of outsourcing services besides after the manufacturing industry [8]. This is because banks want to focus on their core competencies, allowing suppliers to manage their business processes [2]. Given the prevalence of business process outsourcing, the results of the study can be generalized beyond the boundaries of the banking industry. The reason for this is that they possess a high level of specificity.

5.4 Methodological implications

Incorporating the viewpoints of both parties involved in this study can enhance its reliability and foster greater understanding [48]. Furthermore, the prediction of business process outsourcing relationships is likely to yield inadequate and misleading insights if the opinions of both parties are not thoroughly understood [10]. In the present study, an examination was conducted to identify the differences and similarities in opinions among the parties concerning the manifestation of opportunistic behavior exhibited by suppliers. Additionally, the researchers conducted cross-validation by comparing suppliers’ self-reported opportunistic behavior with buyers’ reports. By utilizing the present study’s research findings, the researchers may effectively address the critique that the study analysis solely relies on monadic self-reports [49].