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Contracts for Successful Outsourcing: Analyzing the Impact of Pricing Structures, Penalty & Reward Systems, and Liability Clauses on "Good" Sourcing Relationships
Abstract
Outsourcing literature emphasizes the importance of contracts and contract management for outsourcing success. In particular, contract quality has been stressed as a critical success factor to attain expected benefits. But what constitutes an efficient contract from an outsourcer’s point of view? To find out, we address in our case study research, the following research question: How does the design of certain contract elements (such as general terms and conditions, pricing structures, and service level agreements) influence the realization of expected benefits? Our overall goal is to provide a contract framework that highlights elements worth focusing on during contract negotiations as they greatly influence success of the outsourcing deal. First results indicate that (1) in- and outsourcers’ objectives can be matched (ex ante) with penalty and reward systems incorporated in a service level framework and that (2) liability clauses addressing compensations for potential losses (ex post) are major contract issues. Furthermore, particular deal characteristics are identified that indicate when variable pricing is superior to fixed pricing (and vice versa).
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