[Cornelia Gellings, E-Finance Lab]

This research shows, that within an outsourcing relationship, the ‘first best’ optimum can only be reached if the outsourcer is able to directly observe any action taken by the service provider. Evidence is based on a formal derivation of a Principal-Agent-Model. As the ‘omnipresent’ outsourcer is not a realistic approach based on the second best optimum it is shown that any additional information about the service provider’s behavior can improve the contractual relationship between both parties involved.
During the presentations it should be made clear that within an outsourcing relationship not only the overall outcome but also the service provider’s input matters. Therefore, the service provider’s transparency is an important factor which should the considered in further detail when analyzing the effectiveness of outsourcing contracts. As the actual modeling of the Principal-Agent-Conflict in the field of outsourcing has not yet been studied extensively, by developing a basic agency framework, this research provides a basis which further considerations regarding optimal risk and profit sharing can be based on (e.g. setting-up a respective credit and debit system regarding compliance with SLAs).
The practical relevance of this research implies that as much transparency as possible with regard to the service provider’s actions should be agreed upon in a contract. These findings can be implemented by setting-up an efficient monitoring and tracking system. Furthermore, it will be shown that SLAs should not only consider outcome-based components but also input-driven factors.