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Contracting for Collaborative Services

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 typeamong fixed-fee, time-and-materials, and performance-based contractsis 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Science INFORMS

Contracting for Collaborative Services

Management Science , Volume 56 (5): 15 – May 21, 2010
15 pages

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References (78)

Publisher
INFORMS
Copyright
Copyright © INFORMS
Subject
Research Article
ISSN
0025-1909
eISSN
1526-5501
DOI
10.1287/mnsc.1100.1146
Publisher site
See Article on Publisher Site

Abstract

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 typeamong fixed-fee, time-and-materials, and performance-based contractsis 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.

Journal

Management ScienceINFORMS

Published: May 21, 2010

Keywords: Keywords : services ; consulting ; joint production ; contracting ; principal/agent models

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