Vendor Selection, Contract Efficiency, and Performance Measurement in Service Outsourcing

37 Pages Posted: 18 Jan 2011 Last revised: 14 Mar 2012

See all articles by Zhijian Cui

Zhijian Cui

IE Business School, Operations and Technology Management

Sameer Hasija

INSEAD - Technology and Operations Management

Date Written: March 13, 2012

Abstract

This study compares the efficacy of some commonly observed vendor selection and contracting mechanisms with respect to two key challenges in service outsourcing: vendor selection and contract efficiency. We show that competitive bidding yields good selection but contract inefficiency (positive information rent paid by the client); in this process, the winning vendor's bid constitutes the terms of the contract between client and vendor. We then show that if instead the client establishes the contract terms then the "menu" it designs yields contract efficiency but poor selection. In one particular case - namely, when the client establishes the contract terms and may work with a previously nonselected vendor if the first vendor reneges - it is possible to attain good selection and contract efficiency. We also highlight the implications of performance-based contracts in services.

Keywords: Service Outsourcing, Vendor Selection, Performance Measurement, Information Asymmetry, Signaling Game, Auction

Suggested Citation

Cui, Zhijian and Hasija, Sameer, Vendor Selection, Contract Efficiency, and Performance Measurement in Service Outsourcing (March 13, 2012). INSEAD Working Paper No. 2012/32/TOM. Available at SSRN: https://ssrn.com/abstract=1742362 or http://dx.doi.org/10.2139/ssrn.1742362

Zhijian Cui (Contact Author)

IE Business School, Operations and Technology Management ( email )

Finance Department
Castellon de la Plana, 8
Madrid, 28006
Spain

Sameer Hasija

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

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