Joint Product Improvement by Client and Customer Support Center: The Role of Gain-Share Contracts in Coordination

30 Pages Posted: 26 Oct 2011

See all articles by Shantanu Bhattacharya

Shantanu Bhattacharya

Independent

Alok Gupta

University of Minnesota - Twin Cities - Carlson School of Management

Sameer Hasija

INSEAD - Technology and Operations Management

Date Written: October 26, 2011

Abstract

We study the role of different contract types in coordinating the joint product improvement effort of a client and a customer support center. The customer support center's costly efforts include transcribing and analyzing customer feedback, analyzing market trends, and investing in product design. Yet this cooperative role must be adequately incentivized by the client, since it could lead to fewer service requests and hence lower revenues for the customer support center. We model this problem as a sequential game with double-sided moral hazard in a principal-agent framework (in which the client is the principal). We follow the contracting literature in modeling the effort of the customer support center, which is the first mover, as either unobservable or observable; in either case, the efforts are unverifiable and so cannot be contracted on directly. We show that it is optimal for the client to o er the customer support center a gain-share contract when efforts are unobservable, even though it can yield only the second-best solution for the client. We also show that the cost-plus contracts widely used in practice do not obtain the optimal solution. However, we demonstrate that if efforts are observable then a gain-share and cost-plus options based contract is optimal and will also yield the first-best solution. Our research provides a systematic theoretical framework that accounts for the prevalence of gain-share contracts in the IT industry's joint improvement efforts, and it provides guiding principles for understanding the increased role for customer support centers in product improvement.

Keywords: IT outsourcing, gain-share contract, cost-plus contract, joint product improvement, double-sided moral hazard

Suggested Citation

Bhattacharya, Shantanu and Gupta, Alok and Hasija, Sameer, Joint Product Improvement by Client and Customer Support Center: The Role of Gain-Share Contracts in Coordination (October 26, 2011). INSEAD Working Paper No. 2011/111/TOM, Available at SSRN: https://ssrn.com/abstract=1949656 or http://dx.doi.org/10.2139/ssrn.1949656

Alok Gupta

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Sameer Hasija

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

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