Contracting for Collaborative Services
University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area
Uday S. Karmarkar
University of California, Los Angeles (UCLA) - Anderson School of Management
Scott M. Carr
LECG - Washington, DC
July 18, 2012
In this paper, we analyze the contracting issues that arise in collaborative services, such as consulting, financial planning, and IT 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.
JEL Classification: C61
Date posted: July 18, 2012
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