Essays on Designing and Managing Service Outsourcing Contracts

The global market for outsourced services has doubled to more than one hundred billion dollars over the past decade. While firm-level service outsourcing has received growing attention in the literature, there is less research on designing and managing contracts for outsourced services (i.e., service contracting). Practically speaking, many services are highly specialized or unique, creating significant challenges when it comes to designing and managing outsourcing contracts effectively. By examining decisions related to contract design and management, this dissertation seeks to provide managerial insights on service outsourcing not revealed in the prior literature. Specifically, an in-depth survey has been conducted in multiple industries (healthcare, oil and gas, and manufacturing) to collect information on a variety of outsourced services. The dissertation consists of two essays. Drawing on transaction cost theory (TCT), the first essay investigates the relationships among transaction hazards, contract specificity, monitoring, and service performance. The empirical results unlock these relationships by revealing that 1) transaction hazards drive contract specificity, and 2) monitoring mediates the relationship between contract specificity and performance. The second essay applies the Kraljic Portfolio Model to manage service outsourcing contracts strategically. The framework first maps services into four quadrants based on the importance of purchasing and market complexity. It further develops detailed sourcing practices for services in each quadrant based on the strategies proposed by the Kraljic portfolio purchasing model. The empirical findings of this essay shed light on identifying the most effective supply management practices for services.