Better Selection or Efficient Contracting: The Choice of Service Outsourcing Process
Speaker
Abstract
| By comparing two service outsourcing processes – competitive bidding and negotiation -- this study shows the contingencies under which one outsourcing process dominates another. We show that competitive bidding yields good selection but contract inefficiency; in contrast, the negotiation process enables outsourcing firms to achieve perfect efficiency but result in poor vendor selection. Hence, the outsourcing process involves a fundamental trade-off: one cannot simultaneously maximize the chance of selecting the best vendor and the efficiency of contracting with the vendor selected. We show in particular that competitive bidding dominates the negotiation process in most feasible conditions. However, when vendor selection becomes less risky and more costly, the negotiation process can yield a higher expected payoff for the outsourcer than an optimal competitive bidding process. This study also highlights the implications of a performance menu: a contract menu that involves multiple performance measures. We show that a performance menu under the negotiation process enables the client to achieve perfect contract efficiency whereas, under competitive bidding process, it increases the client’s expected payoff by increasing the competitions between vendors. |
| Contact information: |
| Dr. N. Mishra |
