Valuate Outsourcing Contracts from Vendors' Perspective: A Real Options Approach

To date, most applications of real options theory (ROT) in outsourcing literature are modeled from the clients’ side. Little attention has been paid to vendors’ options in outsourcing. In this article, we study outsourcing from the vendors’ perspective by analyzing vendors’ value of waiting. The contribution of our research to the literature lies in our analysis of a model that compensates for vendors’ loss of option to wait since they have to exercise outsourcing contracts at clients’ given timing. Such a compensation-oriented model yields new insights about the vendors’ valuation of outsourcing opportunities, and offers important practical guidance to vendors’ decision making. Subject Areas: Mathematical Models, Outsourcing Contracts, and Real Options Theory.