Managing risks in information systems outsourcing: An approach to analyzing outsourcing risks and structuring incentive contracts

Information systems outsourcing is now almost standard practice for many companies. Outsourcing the information processing activities is a complex issue that entails considerable implications for the strategy of the firm. An important mechanism for managing the performance of outsourcing vendors is incentive contracts. But to develop an outsourcing contract the IS manager must quantify risks and benefits. However methods and tools for analyzing and quantifying outsourcing risks that IS managers have at their disposal are rudimentary. In this paper we offer a method and some mathematical models for analyzing risks and constructing incentive contracts for IS outsourcing. We are aware that most managers do not like to use mathematical models, consequently we have minimized the technical discussion and have illustrated how this model could be implemented using spreadsheet software for ease of use.     

规模效应下产品具有可替代性的竞争企业的外包决策

针对产品具有一定替代性的两个竞争企业(分别为企业1和企业2)和存在规模效应的上游供应商的外包决策问题, 构建了企业1 外包前后各方的利润模型,求解了下游企业的外包和自产的最优策略以及供应商的最佳批发价格,分析了企业1 的外包策略对企业2 和供应商的外包决策的影响,比较了产品替代性对外包前后各决策变量的影响。研究发现:当企业的单位生产成本高于外包成本时,企业也可能选择自产;而当企业的单位生产成本低于外包成本时,企业也可能选择产品外包。并对模型进行进一步的拓展,比较了下游企业作顺序和同时外包决策两种情景的异同。     

The construction of a comprehensive model for production strategy evaluation

To acquire reasonable profits and to be competitive in the globalize market, more and more firms today have exploited various kinds of production strategies, such as outsourcing, joint venture, or some kind of strategic alliance. Since every production strategy has its benefits and costs and may bring a firm different opportunities and risks, which kind of production strategy is the most suitable for a firm to carry out is a difficult and complicated decision with a high degree of uncertainty. Therefore, this research proposes a comprehensive production strategy evaluation model that can facilitate such a decision making for a firm. The factors that should be considered for devising a production strategy are listed for the benefits, opportunities, costs and risks (BOCR) merits first, and fuzzy Delphi method is applied next to select the most important factors under each merit. A network with BOCR merits is constructed to incorporate the selected factors, and fuzzy analytic network process is then applied to consider the interdependence and feedback inside the network. The proposed model can effectively aid decision making on which kind of production strategy should be adopted by a firm. A case of a printed circuit board manufacturer is presented for the illustration of the proposed model.     

A hybrid model for selection of an outsourcing provider

Outsourcing is a good strategy for firms that need to reduce operating costs and improve competitiveness and it is important that firms scientifically select appropriate outsourcing providers. Some efforts have been made to find systematic ways to deal with outsourcing problems, but these efforts incorrectly assumed that the criteria used in the decision process are independent, which is not true in the real world. In this study, we propose a new hybrid multiple criteria decision-making (MCDM) model, which addresses the dependent relationships between the various criteria. The relations-structure among the criteria is built with the aid of the decision-making trial and evaluation laboratory (DEMATEL) method. Decision-makers tend to hold diverse opinions about their preferences due to incomplete information and knowledge, or inherent conflict between various departments. We further used the fuzzy preference programming and the analytic network process (ANP) to form a model for the selection of partners for outsourcing providers. The proposed model can help practitioners improve their decision making process, especially when criteria are numerous and inter-related. The method is demonstrated using data from a Taiwanese airline.     

Analysis of back-office outsourcing contracts for financial services operations

Managing back-office operations for financial services is a challenging task because of highly volatile and dynamic demand requirements. Lack of service inventories, the inability to backlog demand and significant shortage and overage costs complicate the problem. In such situations, outsourcing all or part of the demand to third-party vendors provides a viable and cost effective option for the firm. Motivated by the remittance processing operations of a Fortune 100 company we examine the usefulness of complementing in-house staffing with different outsourcing arrangements. We study capacity-based and volume-based contracts between a financial services firm and an outsourcing vendor. We examine the impact of demand characteristics on the parameters of contract choice. Through extensive numerical analysis, we ascertain that neither contract is universally preferred, but cost and revenue structures along with demand characteristics determine contract choice.     

Design outsourcing in the fashion supply chain: OEM <Emphasis Type="Italic">versus</Emphasis> ODM

Design innovation is the engine of fashion. Many fashion firms outsource design innovation to their suppliers. Design outsourcing is on the rise in the fashion supply chain, but research in this area lags behind industry practice. In this paper, we examine how design outsourcing affects the supply chain, and we compare supply chain performance under an Original Equipment Manufacturer (OEM) strategy versus an Original Design Manufacturer (ODM) strategy. We evaluate a market size outsourcing model where design enhancement influences market size, and a success probability outsourcing model where design enhancement influences the success probability of innovation. We find that when the supplier trades with the retailer via a wholesale price contract under the ODM strategy, the supplier has no incentive to invest in innovation. In the market size outsourcing model, the design innovation in the centralized supply chain is higher than that under the OEM strategy. However, in the success probability outsourcing model, the success probability of innovation under the OEM strategy is higher than that in the centralized supply chain. Furthermore, we find that a profit sharing contract can achieve supply chain coordination under both OEM and ODM strategies; whereas, revenue sharing and buyback contracts cannot.     

Offshore outsourcing decision making: A policy-maker’s perspective

This research aims at finding the best governing policy for offshore outsourcing of business activities. We use Analytical Network Process, a multicriteria decision making methodology, to create the evaluation framework. From the perspective of decision makers, stakeholders, and influence groups, four policy options are evaluated with respect to approximately 50 economic, political, technological and other factors. The model provides both long-term and short-term views of the outsourcing issue concerned to all parties. The all-inclusive approach helps policy makers to decide on the best policy and has the potential to ease tension between proponents and opponents of offshore outsourcing.     

供应中断风险下采购与定价决策分析

供应中断是供应链上的企业可能面临的问题,运用合理的采购策略可以帮助企业有效缓解供应中断风险。本文研究了供应中断下供应商和制造商之间的纵向竞争和两个制造商之间的横向竞争问题。供应商制定批发价,两个制造商采用不同的采购策略进行产量博弈,其中一个制造商采用紧急双源订货策略,另一个采用可靠单源订货策略。论文采用了多阶段博弈模型,分析了制造商之间的合谋与竞争两种行为,求出了供应商和制造商的最优决策,比较了这两种行为对供应商和制造商的影响。通过数值分析,讨论了成本参数和可靠性参数对于最优订货量的影响以及对于采用不同订货策略的制造商期望利润的影响。     

Using neural networks for identifying organizational improvement strategies

The struggle to remain competitive in the global marketplace occupies much of the energy of today's firms. Although there are many performance improvement strategies that can be implemented by an organization, it is yet to be determined which strategy or combination of these strategies, if any, is most helpful in improving performance. A genetic algorithm trained neural network is used to identify such combinations to provide direction to managers as to which performance improvement strategies are associated with increases in performance as reported by operations managers. This study shows that this neural network approach can identify combinations that result in better approximations of performance, as compared to standard statistical techniques, and should be considered as an appropriate tool for performance improvement strategy selection.     

Supply chain networks with global outsourcing and quick-response production under demand and cost uncertainty

This paper develops a modeling and computational framework for supply chain networks with global outsourcing and quick-response production under demand and cost uncertainty. Our model considers multiple off-shore suppliers, multiple manufacturers, and multiple demand markets. Using variational inequality theory, we formulate the governing equilibrium conditions of the competing decision-makers (the manufacturers) who are faced with two-stage stochastic programming problems but who also have to cooperate with the other decision-makers (the off-shore suppliers). Our theoretical and analytical results shed light on the value of outsourcing from novel real option perspectives. Moreover, our simulation studies reveal important managerial insights regarding how demand and cost uncertainty affects the profits, the risks, as well as the global outsourcing and quick-production decisions of supply chain firms under competition.     

Learning effects on maintenance outsourcing

The objective of this paper is to study learning effects on maintenance outsourcing. We consider a situation in which a manufacturer offers a short-term outsourcing contract to an external contractor who is responsible for scheduling and performing preventive maintenance and carrying out minimal repairs when the process fails. The manufacturer’s payment to the contractor consists of a fixed amount along with cost subsidization for each maintenance operation performed. We assume learning occurs when the contractor performs preventive maintenance that reduces both time and cost. Two types of learning are considered: natural learning and learning by costly efforts. We demonstrate that a well-designed payment scheme can induce the contractor to adopt the maintenance schedule that maximizes the manufacturer’s profit.     

企业关系视角下的知识流程外包策略研究

基于企业的关系视角,讨论了企业选择知识流程外包的可能动机。具体而言,在控制服务成本差的背景下,考虑企业间协同合作产生的关系租金与知识传递的信息粘性对企业选择外包策略进行分析。区别于传统基于服务成本差的外包策略,结论指出由于存在信息粘性的影响,服务提供商仅仅具有较高信息处理能力是不能保证企业选择外包。同时指出,即使当服务提供商不具有任何成本优势,基于合作战略的高关系租金也能成为企业选择知识流程外包的又一动机。通过将成本优势和关系优势进行比较,我们指出两类优势对于企业的外包绩效具有互补性,对于企业进行知识流程外包的决策具有替代性。     

Equilibrium two-part cost structures

We consider an oligopolistic product market in which two competing firms instead of paying a competitive input price choose a two-part tariff. Costs for the input are divided up into upfront fixed costs independent of the output level and reductions in marginal costs. We explore under which competitive settings will such a two-part cost structure correspond to equilibrium behavior in a two stage game. We find that firms in a static model do have an incentive to choose a two-part cost structure when competition in the product market is not too strong and oligopoly rents can be shifted form the rival to the own firm. In a dynamic market when firms use Markov strategies competition is so intense that there are no rents to be shifted and firms do not benefit from two-part cost structures.     

Optimal Contract Design of Supplier-Led Outsourcing Based on Pontryagin Maximum Principle

This paper provides a supplier-led outsourcing model to maximize the supplier’s profits based on a principal-agent framework with both asymmetric cost information and uncertain market demand information described by continuous random variables. The salvage value of the unsold product is processing-cost dependent. By converting the proposed model, which is a dynamic optimization problem, to an optimal control problem, we obtain the analytical form of the optimal supplier outsourcing contract composed of the wholesale price and the transfer payment by applying Pontryagin’s maximum principle. It is shown that the optimal contract is directly related to the supplier’s beliefs about the manufacturer’s unit cost and the salvage value function. The Pontryagin’s maximum principle-based solution method serves as a powerful tool to support the decision making for the best sourcing strategy, and it provides analytical insights for outsourcing management. Finally, numerical examples are presented to illustrate the validness of the theoretical results.     

Service quality,outsourcing and upward channel decentralization

We build a model to analyse the benefit of upward channel decentralization for a firm choosing service outsourcing and integration. The key findings of this paper are as follows. First, we formulate an upward channel decentralization problem as a game incorporating consumer behaviour of willingness to pay in a channel duopoly. Our model considers (i) service quality, (ii) consumer marginal willingness to pay (MWTP), and (iii) consumer perceivable difference. A supply chain firm’s preference of outsourcing strategy depends on the monotonicity of both the failure rate (or Mills Ratio) and CDF-PDF ratio of MWTP distribution function. Second, we use this model to explore the benefit of retailer strategy of upward channel decentralization. An equilibrium can be achieved by benefiting the low-label product with low quality service but deteriorating the high-label channel product with high quality.     

A study of high-level managerial decision processes, with implications for MCDM research

We study six real-world major strategic decisions and discuss the role that analytic Multiple Criteria Decision Making (MCDM) models could play in helping decision makers structure and solve such problems. We have interviewed successful and well-educated managers who had access to quantitative decision models, but did not use them as part of their decision process. Our approach is a clinical one that takes a close look at the decision processes. We believe that the normative MCDM framework is oversimplified and does not always fit well with complex, real-world organizational decision processes. This may be one reason why decision tools are not used more widely for solving high-level decision problems. We believe that it would be worthwhile to revise some of the MCDM mainstream postulates and practices to make existing models and tools more suitable for practical purposes. The MCDM mainstream research has until today focused on the choice among alternatives. One should realize that MCDM models could also be used in creating alternatives, in assessing the importance of criteria, in providing the decision makers with “post-commitment support”, and as part of a devil's advocate approach.     

Service outsourcing under co-opetition and information asymmetry

Co-opetition refers to the phenomenon that firms simultaneously cooperate and compete in order to maximize their profits. This paper studies the contracting for an outsourcing supply chain (a user company vs. a service provider) in the presence of co-opetition and information asymmetry. The user company outsources part of his service capacity at a discount price to the service provider for sale. The service provider charges a commission for doing outsourcing work and competes with the user company for the service capacity to satisfy their respective demands. We solve for the service provider’s optimal commission decision and the user company’s optimal outsourcing decisions (outsourcing volume and price discount) when the user company has private information about his service capacity. Specifically, we highlight the following observations. For the service provider, a menu of two-part tariffs that consist of a fixed commission and a per-volume commission can reveal the true type of the user company’s capacity; the user company’s optimal outsourcing proportion is quasi-convex and the optimal price discount is non-decreasing in his capacity volume, which is counterintuitive.     

Multicriteria decision making on maintenance: Spares and contracts planning

The competitiveness of an industrial system is directly related to decision making in areas of product support logistics, such as the maintenance area. Multicriteria decision making takes into account various aspects associated with competitiveness of the system. This paper presents multicriteria decision models for two maintenance problems: repair contract selection and spares provisioning. In the repair contract problem the model incorporates consequences modelled through a multiattribute utility function. These consequences consist of contract cost and system performance, represented by the system interruption time. Two criteria (risk and cost) are combined through a multiattribute utility function in the spares provisioning decision model. This paper presents the formulation and derivations for both models and the numerical application illustrates the use of models including sensitivity analysis.     

Reducing the debt: is it optimal to outsource an investment?

This paper deals with the problem of outsourcing the debt for a big investment, according two types of contract: either the firm outsources both the investment (and the associated debt) and the exploitation to another firm (for example a private consortium), or the firm supports the debt and the investment but outsources the exploitation. We prove the existence of Stackelberg and Nash equilibria between the firms, for both types of contract. We compare the benefits of these contracts, theoretically and numerically. We conclude with a study of what happens in case of incomplete information, in the sense that the risk aversion coefficient of each partner may be unknown by the other partner.     

A framework for sensitivity analysis of decision trees

In the paper, we consider sequential decision problems with uncertainty, represented as decision trees. Sensitivity analysis is always a crucial element of decision making and in decision trees it often focuses on probabilities. In the stochastic model considered, the user often has only limited information about the true values of probabilities. We develop a framework for performing sensitivity analysis of optimal strategies accounting for this distributional uncertainty. We design this robust optimization approach in an intuitive and not overly technical way, to make it simple to apply in daily managerial practice. The proposed framework allows for (1) analysis of the stability of the expected-value-maximizing strategy and (2) identification of strategies which are robust with respect to pessimistic/optimistic/mode-favoring perturbations of probabilities. We verify the properties of our approach in two cases: (a) probabilities in a tree are the primitives of the model and can be modified independently; (b) probabilities in a tree reflect some underlying, structural probabilities, and are interrelated. We provide a free software tool implementing the methods described.