Public Sector Outsourcing to a Subsidiary Company from a Principal-agent Perspective: Efficiency or Challenges?

Authors

  • Suhaiza Ismail Department of Accounting, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, 50728 Kuala Lumpur, Malaysia
  • Hawa Ahmad Department of Accounting, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, 50728 Kuala Lumpur, Malaysia
  • Norsyahida Mokhtar Department of Accounting, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, 50728 Kuala Lumpur, Malaysia
  • Mohamed Aslam Mohamed Haneef Department of Economics, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, 50728 Kuala Lumpur, Malaysia

DOI:

https://doi.org/10.24191/bej.v23i2.9469

Keywords:

Outsourcing, Public Sector, Subsidiary Company, Facilities Management, Principle-Agent

Abstract

Using the lens of principal-agent theory, this study examines the efficiency paradox and governance challenges in outsourcing facilities management (FM) services to a subsidiary company within the public sector. A case study approach was employed to investigate a higher learning institution’s FM outsourcing arrangement. Data were collected through semi-structured interviews and focus group discussions involving key stakeholders, including representatives of the parent institution, end users, FM staff, and finance officers. Relevant documents, including contracts and performance reports, were also reviewed. The qualitative data were analysed thematically. The findings reveal critical agency-related tensions arising from internal outsourcing. Goal incongruence emerged as the subsidiary prioritised cost reduction over service quality, leading to staff shortages and heavier workloads. Information asymmetry manifested through incomplete and inaccurate reporting, which constrained the principal’s capacity to monitor performance effectively. The subsidiary’s excessive reliance on the principal for supervision blurred the accountability boundaries, undermining the intended efficiency gains. Moreover, weak contract enforcement and monitoring mechanisms enabled opportunistic behaviour, false reporting, and diminished accountability. This study is among the few to explore public sector outsourcing to a subsidiary company, a hybrid arrangement that combines elements of both internal and external contracting. It advances the outsourcing literature by exposing the unique agency risks, governance gaps, and accountability dilemmas inherent in such quasi-market relationships.

Author Biographies

  • Suhaiza Ismail, Department of Accounting, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, 50728 Kuala Lumpur, Malaysia

    Suhaiza Ismail is a Professor at Department of Accounting, International Islamic University Malaysia specializing in public sector accounting and professional ethics. Her research focuses on public sector reform, public private partnership (PPP)/ Private Finance Initiative (PFI), public procurement and accountability. She co-authored the book Public Private Partnership: 40 Years Journey in Malaysia and actively contributes to public policy and academic discourse. She can be contacted at suhaiza@iium.edu.my 

  • Hawa Ahmad, Department of Accounting, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, 50728 Kuala Lumpur, Malaysia

    Hawa Ahmad is an Associate Professor at Department of Accounting, International Islamic University Malaysia (IIUM). She is a member of Malaysian Institute of Accountants (MIA) and Malaysia Board of Technologists (MBOT). She teaches accounting and analytics, with research interests focused on accounting education and the integration of technology in accounting. She can be contacted at hawahmad@iium.edu.my   

  • Norsyahida Mokhtar, Department of Accounting, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, 50728 Kuala Lumpur, Malaysia

    Norsyahida Mokhtar is an Assistant Professor at Department of Accounting, International Islamic University Malaysia (IIUM). Her research interests include environmental accounting and reporting, management accounting, accounting information system and sustainability. She can be contacted at syahida_m@iium.edu.my   

  • Mohamed Aslam Mohamed Haneef, Department of Economics, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, 50728 Kuala Lumpur, Malaysia

    Mohamed Aslam Haneef is Professor of Islamic Economics and currently the Deputy Rector (Research, Innovation and Development) at the International Islamic University Malaysia (IIUM). He has contributed to the development of the discipline as well as in integrating Islamic perspectives into economics, education and policy, emphasising ethical values in governance especially in the development of the third sector in society. He also sits on the Board of Directors, Institute of Strategic and International Studies Malaysia as on the Executive Committee of the International Association of Islamic Economics. He can be contacted at mdaslam@iium.edu.my 

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Published

03-07-2026

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Vol. 23 No. 2 (2026): Built Environment Journal

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Copyright (c) 2026 Suhaiza Ismail, Hawa Ahmad, Norsyahida Mokhtar, Mohamed Aslam Mohamed Haneef

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Public Sector Outsourcing to a Subsidiary Company from a Principal-agent Perspective: Efficiency or Challenges?. (2026). Built Environment Journal, 23(2). https://doi.org/10.24191/bej.v23i2.9469

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