Information technology (IT) infrastructure outsourcing arrangements involve multiple services and processes that are interdependent. The interdependencies pose significant challenges in designing appropriate incentives to influence a provider's effort-allocation decisions. By integrating process modeling fundamentals with multitask agency theory, we enumerate the base set of possible interrelationships among different IT service processes and derive corresponding optimal incentives. Our results demonstrate the impacts of risk profile, random noise, value-cost ratio, and process structure on optimal incentive rates. We find that the current practice of treating IT services as essentially independent is optimal only in limited settings where both the service provider and customer are risk neutral. Interestingly, incongruent performance measures require optimal incentive rates to respond in complex ways to the strength of coupling between services and the complementarity and substitutability of services. We also analyze more complex process scenarios using different combinations of the base set. The results demonstrate that, while the findings from the base set largely hold, the value-cost ratio of the services and the performance measure congruity can pose unique challenges in determining incentive rates.
In an information technology services outsourcing arrangement, variance in demand volume and individual user preferences pose significant challenges to the provider organization in making resource allocation decisions. Such variations affect service levels, especially under fixed resource constraints. We explore the possible role of periodic demand information sharing and subsequent resource-level adjustments as a means of addressing issues arising from demand variation. As information exchange alters the dynamics of the relationship between the customer and provider organizations, incorporating information sharing in service-level agreements requires modifying current pricing schemes. A pricing heuristic is developed and tested under varying levels of information accuracy and granularity. The heuristic is shown to provide better economic welfare for both participants in comparison to the baseline pricing strategies considered. Also, it is shown that information, even at a coarse level of granularity, is very effective in providing stable service levels--a finding that is encouraging for enhanced collaborations between customer and provider organizations in outsourcing arrangements.
A key feature of service-oriented models of information technology is the promise of prespecified quality levels enforceable via service level agreements (SLAs). This poses difficult management problems when considerable variability exists in user preferences and service demand within any organization. Because variance in expectations impact service levels, effective pricing and resource allocation mechanisms are needed to deliver services at the promised quality level. In this paper, we propose a mechanism for SLA formulation that is responsive to demand fluctuations and user preference variance, with the objective of maximizing organizational welfare of the participants. This formulation features a dynamic priority based price-penalty scheme targeted to individual users. An analytical model is presented and evaluated for effectiveness of a proposed dynamic priority-based pricing scheme vis-à-vis a baseline fixed-price single-quality level SLA. Simulations using data from an existing SLA is used to provide evidence that the proposed dynamic pricing scheme is likely to be more effective than a fixed-price approach from a system welfare perspective.