Social Proof

Social proof refers to looking to the actions of others in times of uncertainty to determine appropriate action. One school of organizational research believes that managers imitate peers believed to be successful, to minimize search costs and gain legitimacy. In an earlier post, I had remarked about how companies that announce an outsourcing deal perform on average 1.7 per cent higher in the stock markets benchmarked against others in their sector that have not announced outsourcing deals. This perceived legitimacy of outsourcing may create normative pressures on firms to outsource business processes without clarity on their benefits. It also explains the BPO paradox: increasing investment in outsourcing services despite the inability of outsourcing to meet business expectations. Research also suggests that such mimetic behavior is fragile and can get reversed quite suddenly when companies receive new information. One must ask what will reverse the outsourcing bubble (if that's what it is). You heard it here first.