An Incentive Model of IS Outsourcing Contract

An approach to analyze incentive schemes and structuring IS outsourcing contracts for the mutual gain is presented in this paper. Outsourcing contract is critical to the management of the IS outsourcing relationship because improperly or incompletely written contracts can have significant negative implications for the firms. A linear principal-agent model based on EVA (Economic Value Added) for constructing incentive contracts in IS outsourcing is developed. Incentive management literature relative to linear principal-agent model has focused on determining the proportion of agent's profit to principal's profit to receive maximum economic returns from agent's action. In fact, the validity of incentive is decided by the positive correlation between the variable of agent's performance and outsourcing output. Arguing the feasibility of using EVA to evaluate the outsourcing vendor's performance in IS outsourcing, a linear principal-agent model based on EVA is devised for improving IS outsourcing vendors' performance and the advantage and disadvantage of this model was discussed.