Call Center Outsourcing Contract Design and Choice

This paper considers a call center outsourcing contract design and choice problem, faced by an outsourcing vendor and a service provider. The service provider receives an uncertain call volume over multiple-periods, and is considering outsourcing all or part of these calls to an outsourcing vendor. Each call brings in a fixed revenue to the service provider. Answering calls requires having service capacity, thus implicit in the outsourcing decision is a capacity decision. Insufficient capacity implies that calls cannot be answered, which in turn means there will be a revenue loss. Faced with a choice between a volume-based and a capacitybased contract offered by an outsourcing vendor who has pricing power, the service provider determines optimal capacity levels. The optimal price and capacity of the outsourcing vendor together with the optimal capacity of the service provider determine optimal profits of each party under the two contracts being considered. Each party will prefer the contract that leads to higher profits. The paper characterizes optimal capacity levels, and partially characterizes optimal pricing decisions under each contract. The impact of demand variability and economic parameters on contract choice are explored through numerical examples. It is shown that no contract type is universally preferred, and that operating environments as well as cost-revenue structures have an important effect in outsourcing contract design and choice.