Failing to estimate the costs of offshoring: A study on process performance

• Cost estimation errors decrease offshoring process performance.
• Coordination through ongoing communication worsens the effect.
• Coordination through modularity improves the effect.

This article investigates cost estimation errors in the context of offshoring. It is argued that an imprecise estimation of the costs related to implementing a firm 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 managerial distraction and resource misallocation. It is also argued that this relationship is mitigated by the extent to which firms use modularity to coordinate the activity but worsened by the extent to which ongoing communication is used. The results, based on a hierarchical regression analysis of a unique survey on Danish and Swedish firms, support these arguments.