Outsourcing Relationships: Designing 'Optimal' Contracts: A Principal-Agent-Theoretic Approach

Information Systems literature emphasizes the importance of efficient contracts for managing outsourcing relationships. However, there is a lack of proven and tested contract designs in theory as well as in practice. With the help of Economic Theory we analyze the underlying dynamics of an outsourcing relationship. Based on mathematical Principal-Agent-Theory we aim at answering the following questions: (1) ‘what are the characteristics of an ‘optimal’ outsourcing contract?’ and (2) ‘how can the Outsourcer contractually implement incentives for the Service Provider?’. Our theoretical findings stress that within an ‘optimal’ contract the marginal utilities of both parties involved have to be proportional. For practical implications this means that an increase of the Service Provider’s profit has to be accompanied by a decrease in the Outsourcer’s costs. To accomplish this we show how incentives can contractually be implemented as suggested by Principal-Agent-Theory. We test our findings based on a single case study research.