Using Agency Theory to Design Successful Outsourcing Relationships

Abstract

Outsourcing affects thousands of companies and employees every year. Recent studies indicate that 85 per cent of all companies outsource at least one function generating billions of dollars in outsourcing contracts (ElmutiElute, KathwalaKithara & Monippallil, 1995). Transportation is one of outsourcing's biggest players. Many outsourcing attempts have proved unsuccessful and recent articles blame these failures on failed outsourcing relationships. This paper addresses these failed relationships and suggests two possible solutions to the problem. The first solution is to diagnose the relationship from both sides of the contract. The second suggestion is to engage agency theory to help design the types of contracts and relationships necessary to provide and support an environment of trust.

Impact of Logistics Outsourcing Strategy in Oil and Gas Industry in Uganda

“…Chima (2007), Cheong (2004, Ahimbisibwe et al (2012) indicated that performance indices for logistics outsourcing and customer relationship management as solutions to overcome challenges as it has been supported by 4 managers to the impeding challenges which could have led to low performance levels in the oil and gas industry. The most important remedy is customer relationship management as shown in Table 6 which triggers customer service delivery and lows lead time since managers and employees can easily access most recent data immediately about customers need whenever they need (Logan, 2000).…”

“…All the responses are organized in Table 9 where managers came up with some remedies which could help to bring positive results like: customer relationship management and suitable performance tactic which can help companies in achieving competitive advantage and high customer service delivery (Esther & Katuse, 2013). Logan (2000) noted that outsourcing strategy is rarely an easy strategy and create great upheaval and adversely affect logistics performance if handled poorly. Challenges faced by logistics service providers found better solutions which include performance margins for logistics outsourcing and information sharing encouragement mechanisms among others.…”

Conceptualizing Relational Resources as Critical Factor for IT Outsourcing Success

“…Secondly, agency theory is also relevant to stage of monitoring the relationship during contract execution. In this stage it assists in defining the appropriate means for maintenance of long and short-term equilibrium between the needs of the two parties: on the client side, the need for guarantees of high levels of service; on the vendor side, the need for agreement that the client's objectives have been satisfied in full (Eisenhardt, 1989;Logan, 2000;Poppo, & Zenger, 2002).…”

“…Renegotiation is the request by the service provider for greater payment than appropriate: the provider outsmarts the client, opportunistically exploiting his much greater knowledge of IT services. Hence the focus of agency theory is on how to define the most efficient contract possible to govern the agency relationship, which would permit the principle to have the maximum possible control over what the provider does in terms of quality of services, and at the same time permit the agent to satisfy the principle through achievement of his specific objectives (Logan, 2000).…”

Contract functions in service exchange governance: evidence from logistics outsourcing

“…Existing studies describe the typical contract structure e.g. in terms of contract duration, expected behaviors, service level targets, and risk and liabilities allocation (Wilding and Juriado 2004;Logan 2000;Boyson et al 1999). Such literature, however, offers limited insights into how specific contractual provisions may contribute to exchange governance (Hofenk et al 2011).…”