Contracting for Collaborative Services

In this paper, we analyze the contracting issues that arise in collaborative services, such as consulting, financial planning, and information technology outsourcing. In particular, we investigate how the choice of contract type-among fixed-fee, time-and-materials, and performance-based contracts-is...

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Bibliographic Details
Published in:Management science 2010-05, Vol.56 (5), p.849-863
Main Authors: Roels, Guillaume, Karmarkar, Uday S., Carr, Scott
Format: Article
Language:English
Subjects:
agent models
Applied sciences
Business management
Collaboration
consulting
Consulting firms
Consulting services
Contract incentives
contracting
Contracts
Cost efficiency
Exact sciences and technology
Fees
Financial planning
Firm modelling
Forecasts and trends
Information technology
joint production
Labour contract
Management science
Mechanical engineering. Machine design
Moral hazard models
Operational research and scientific management
Operational research. Management science
principal
Principal components analysis
principal/agent models
Risk aversion
Services
Studies
Subcontracting
Supply chain management
Total surplus
Vendors
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Summary:In this paper, we analyze the contracting issues that arise in collaborative services, such as consulting, financial planning, and information technology outsourcing. In particular, we investigate how the choice of contract type-among fixed-fee, time-and-materials, and performance-based contracts-is driven by the service environment characteristics. We find that fixed-fee contracts contingent on performance are preferred when the service output is more sensitive to the vendor's effort, that time-and-materials contracts are optimal when the output is more sensitive to the buyer's effort, and that performance-based contracts dominate when the output is equally sensitive to both the buyer's and the vendor's inputs. We also discuss how the performance of these contracts is affected with output uncertainty, process improvement opportunities, and the involvement of multiple buyers and vendors in the joint-production process. Our model highlights the trade-offs underlying the choice of contracts in a collaborative service environment and identifies service process design changes that improve contract efficiency.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.1100.1146