Outsourcing Service Processes to a Common Service Provider Under Price and Time Competition

Abstract

In many industries, firms consider the option of outsourcing an important service process associated with the goods or services they bring to the market. Often, competing firms outsource this service process to one or more common service suppliers. When they outsource to a common service provider, this gives rise to a service supply chain. We develop analytical models to characterize the benefits and disadvantages of outsourcing in service industries in which the retailers compete with each other in terms of the price they charge and/or the waiting time expectations and standards which they adopt and sometime advertise.

To assess the benefits of outsourcing strategies, we give concrete answers to the following questions: (i) if a service supply chain wants to operate at maximum efficiency, what type of payment schemes does the service provider need to offer the retailers to coordinate the chain? (ii) Given optimally coordinating payment schemes for the outsourced service, when are firms better off if all of them choose to outsource rather than perform the service in-house? In addition, when will a service supply chain in which firms choose to outsource to a common provider be stable in the sense that no firm has an incentive to unilaterally abandon the chain and provide in-house service instead? How do the answers to these questions depend on the type of competition, the intensity of the competition, the number of firms in the industry and the sales volume of the firms? (iii) How do the answers to the questions raised in (i) and (ii) depend on whether the outside supplier pools the service processes or not and whether it is able to operate at lower cost rates than the service retailers themselves?

Keywords: outsourcing, service, processes, common, providers