Outsourcing Contracts - Old wine, new bottle
Feel like I've been living my life in conferences this past week. After the International Conference of Information Systems in Milwaukee last week, it's the Indian Symposium on Information Systems at the Indian School of Business in Hyderabad this week.
The subject of my presentation at both places is the governance of outsourcing relationships. In particular, I make the point that as outsourcing initiatives become more strategic and collaborative, the outsourcing contract, in addition to its traditional function of resolving incentive conflicts between the firms and protecting the client from possible adverse behavior of the provider, takes on a more interesting role. The allocation of risk embedded in the outsourcing contract facilitates information sharing between the client and the vendor to address cognitive conflicts, develop a shared understanding of the outsourced process and related interdependencies and effectively execute the process across firm boundaries.
I explored this premise in the context of two dominant outsourcing contract forms - fixed price and time and materials. The client shares risks and rewards with the provider in time and materials contracts but the provider primarily bears risks and reaps rewards of cost saving efforts in fixed price contracts. I found that concomitant with this incentive structure, there was increased information sharing in time and materials contracts.
Practitioners that I met at the conference stated that this finding is aligned with the broader shift in the practice from penalties to rewards and from transactional pricing to incentive pricing structures. Thus, even though fixed price contracts protect the client maximally from risk, it is inclined to choose time and materials contracts that yield maximal information sharing and coordination of actions across firm boundaries.
So, a fundamentally new role for contracts in the evolving outsourcing landscape. Old wine, new bottle.
The subject of my presentation at both places is the governance of outsourcing relationships. In particular, I make the point that as outsourcing initiatives become more strategic and collaborative, the outsourcing contract, in addition to its traditional function of resolving incentive conflicts between the firms and protecting the client from possible adverse behavior of the provider, takes on a more interesting role. The allocation of risk embedded in the outsourcing contract facilitates information sharing between the client and the vendor to address cognitive conflicts, develop a shared understanding of the outsourced process and related interdependencies and effectively execute the process across firm boundaries.
I explored this premise in the context of two dominant outsourcing contract forms - fixed price and time and materials. The client shares risks and rewards with the provider in time and materials contracts but the provider primarily bears risks and reaps rewards of cost saving efforts in fixed price contracts. I found that concomitant with this incentive structure, there was increased information sharing in time and materials contracts.
Practitioners that I met at the conference stated that this finding is aligned with the broader shift in the practice from penalties to rewards and from transactional pricing to incentive pricing structures. Thus, even though fixed price contracts protect the client maximally from risk, it is inclined to choose time and materials contracts that yield maximal information sharing and coordination of actions across firm boundaries.
So, a fundamentally new role for contracts in the evolving outsourcing landscape. Old wine, new bottle.
posted by Deepa at
6:48 AM
