Outsourcing versus technology transfer: Hotelling meets Stackelberg

This paper considers a Hotelling duopoly with two firms A and B in the final good market. Both A and $B$ can produce the required intermediate good, firm B having a lower cost due to a superior technology. We compare two contracts: outsourcing (A orders the intermediate good from B) and technology transfer (B transfers its technology to A). First we show that an outsourcing order acts as a credible commitment on part of A to maintain a certain market share in the final good market. This generates an indirect Stackelberg leadership effect, which is absent in a technology transfer contract. We show that compared to the situation of no contracts, there are always Pareto improving outsourcing contracts but no Pareto improving technology transfer contracts. Finally, it is shown that whenever both firms prefer one of the two contracts, all consumers prefer the other contract.

Calculative Trust and Interfirm Contracts

Interfirm contracts are plagued by opportunism arising from exchange hazards that increase the seller’s gains from holdup in fixed price contracts. These exchange hazards are higher when the seller can engage in unverifiable deliberate obfuscation. Although cost-plus contracts reduce holdup losses, they suffer from cost inefficiency. Past research has underscored the importance of trust as a control instrument to mitigate losses from exchange hazards, especially social relational trust that develops from past experiences. However, trust can also be calculative when it develops from the expectation of future economic gains to the buyer-seller dyad. We identify two dyadic mechanisms that generate calculative trust and curtail the likelihood of cost-inefficient behavior in cost-plus contracts. These mechanisms include future potential and bilateral reputation capital for cost containment. Analysis using probit estimations on 149 information technology outsourcing contracts for the period 1998 to 2005 suggests that calculative trust increases the likelihood of cost-plus contracts. Thus, calculative trust can mitigate inefficiencies in interfirm contracts. This paper was accepted by Shiva Rajgopal, accounting.

Why Are Some Flag States Unable or Unwilling to Address IUU Fishing?

This article is based on an analysis carried out by a group of experts from the North Atlantic Fisheries Intelligence Group into the flagging pattern of IUU fishing vessels. The article argues that the inability and unwillingness of some flag states to exercise due diligence to ensure that vessels on their register do not engage in IUU fishing may be explained by reference to the market demand and supply of ship registers that provide shipowners with favourable conditions to limit costs and mitigate risks. Some of these ship registers are established and managed by foreign private companies on commercial outsourcing contracts on behalf of economically vulnerable governments, and some of these governments may as a result lack the knowledge, expertise and resources to effectively address IUU fishing of vessels flying their flag.

Legal Regime of Insurance Outsourcing

Following the Solvency II Directive, the detailed rules for delegating own activities to external providers by insurance and reinsurance undertakings have been introduced into the insurance law regime, including the requirements regarding the contents of agreements under which the outsourced services are provided (outsourcing contracts). As institutions of public trust, insurance undertakings should perform their functions properly and safely for customers. Hence, the requirements for outsourcing certain activities and functions constitute an important element of the insurance company management system. Insurance outsourcing is subject to disclosure obligations, and is supervised by the Polish Financial Supervision Authority (KNF). The article discusses legal provisions specifying the basic outsourcing rules for insurance and reinsurance undertakings, including the principles for the development of internal policy and the fulfillment of disclosure requirements, with special emphasis on the outsourcing of certain activities and functions of the management system. Moreover, it also presents the requirements for outsourcing contracts which are imposed on insurance undertakings both by EU and Polish legislation. An appropriate formulation of the rights and obligations of the parties to the contract should ensure, in particular, both compliance with the law and the effective services supervision. More importantly, the KNF has been authorized to perform inspection activities in respect of entities providing outsourced services.

Indigena: Teaching case of IT Impact Sourcing

This teaching case introduces the concept of Impact Sourcing, in the context of global IT outsourcing. While IT outsourcing is a well-established management technique, with a history of at least 30 years, Impact Sourcing is a relatively new concept, conceptualized by the Rockefeller Foundation in 2011 and recently defined by the Global Impact Sourcing Coalition. To summarize this case, a First Nations band collaborated with a successful global outsourcing firm, Accenture, to establish Indigena, a Canadian-based impact-sourcing enterprise. Indigena found it difficult to attract, hire and retain qualified Aboriginal employees. The suburban office location in the high-cost Vancouver market may have been a key challenge in building a robust Aboriginal workforce. However, the challenge of winning outsourcing contracts in a competitive market may have been hindered by the Aboriginal workforce, despite the outward positive response of clients to the Impact Sourcing model. Indigena was not able to meet its social goals and at the same time it struggled to attract and retain clients. It was unable to demonstrate profitable business success, resulting in a strategic challenge from its investors.