Outsourcing a Two-Level Service Process

42 Pages Posted: 23 Sep 2011

See all articles by Hsiao-Hui Lee

Hsiao-Hui Lee

Simon Graduate School of Business, University of Rochester

Edieal J. Pinker

Yale School of Management; Yale University School of Management

Robert A. Shumsky

Dartmouth College - Tuck School of Business

Date Written: August 24, 2011

Abstract

This paper studies outsourcing decisions for a two-level service process in which the first level serves as a gatekeeper for a second level of experts. The objective of the system operator (the client) is to minimize the sum of staffing costs, customer waiting costs, and mistreatment costs due to unsuccessful attempts by a gatekeeper to solve the customer's problem. The client may outsource all or part of the process to a vendor, and first-best contracts exist when the client outsources only gatekeepers or experts. When the client outsources the entire system as a two-level process, a client-optimal contract may not exist unless the exogenous system parameters satisfy a particular (and unlikely) coordination condition. In addition, optimal incentive-compatible contracts exist when the vendor's structure choice (one-level or two-level) can deviate from the client's preference. Finally, we numerically examine how vendor structure choice and labor cost advantages influence the client's optimal outsourcing option.

Keywords: Services, Outsourcing, Queueing,Call Centers

JEL Classification: L8, M5, L1

Suggested Citation

Lee, Hsiao-Hui and Pinker, Edieal J. and Shumsky, Robert A., Outsourcing a Two-Level Service Process (August 24, 2011). Simon School Working Paper No. FR 11-23, Available at SSRN: https://ssrn.com/abstract=1932326 or http://dx.doi.org/10.2139/ssrn.1932326

Hsiao-Hui Lee

Simon Graduate School of Business, University of Rochester ( email )

Rochester, NY 14627
United States

Edieal J. Pinker (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-436-8867 (Phone)

HOME PAGE: http://https://som.yale.edu/faculty/edieal-j-pinker

Yale University School of Management ( email )

New Haven, CT 06520
United States
203-436-8867 (Phone)

Robert A. Shumsky

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

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