Structuring IS Outsourcing Contracts for Mutual Gain: An Approach to Analyzing Performance Incentive Schemes

As information systems managers come under increasing pressure to improve the cost performance of information processing, outsourcing has become an important management strategy. Although information systems outsourcing is now a major industry, it is still a new decision problem for many managers. As managers gain more and more experience with IS outsourcing, satisfaction with vendor performance is becoming a major issue. Key to managing outsourcing relationships is the outsourcing contract. These contracts assign responsibilities and rewards for the parties. However, improperly or incompletely written contracts have lead to adverse problems. How then are managers to choose from a set of options that which is most appropriate for their firm? Outsourcing problems are complex and entail considerable implications for the strategy of the firm. Although many articles have appeared on outsourcing, few have extended the discussion beyond simple cost-benefit analysis. Contracts that encourage vendor performance and discourage under-performance are clearly of interest to managers. In this paper, an approach to analyzing incentive schemes and structuring outsourcing contracts for the mutual gain of the parties is presented. The approach provides managers with a strategy and techniques for analyzing some of the more subtle issues they may face when dealing with complex outsourcing decision problems