As information systems managers come under increasing pressure tornimprove the cost performance of information processing, outsourcing has becomernan important management strategy. Although information systems outsourcing isrnnow a major industry, it is still a new decision problem for many managers. Asrnmanagers gain more and more experience with IS outsourcing, satisfaction withrnvendor performance is becoming a major issue. Key to managing outsourcingrnrelationships is the outsourcing contract. These contracts assign responsibilities andrnrewards for the parties. However, improperly or incompletely written contracts havernlead to adverse problems. How then are managers to choose from a set of optionsrnthat which is most appropriate for their firm? Outsourcing problems are complex andrnentail considerable implications for the strategy of the firm. Although many articlesrnhave appeared on outsourcing, few have extended the discussion beyond simplerncost-benefit analysis. Contracts that encourage vendor performance and discouragernunder-performance are clearly of interest to managers. In this paper, an approachrnto analyzing incentive schemes and structuring outsourcing contracts for the mutualrngain of the parties is presented. The approach provides managers with a strategyrnand techniques for analyzing some of the more subtle issues they may face whenrndealing with complex outsourcing decision problems.
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