Outsourcing timing, contract selection, and negotiation

Abstract

This paper examines outsourcing contracts subject to irreversible outsourcing investment and cost uncertainty. We consider three common outsourcing contracts (fixed-price, cost-plus, and gain-sharing) and address issues of when to outsource and which contracts to select. Motivated by both practical importance and lack of academic research in this area, this paper compares and analyses these contracts’ utilities and outsourcing options’ values and assists managers in timing of outsourcing and selection and negotiation of outsourcing contracts.