The Impact of Contract Design on Outsourcing Success: Case Studies on Risk Mitigation Measures

From the outsourcer’s perspective, the outsourcing literature emphasizes the importance of contracts and risk awareness for managing outsourcing ventures. However, there is a lack of theoretical foundation with regard to the importance of risk and contract design towards outsourcing success. By extending the risk model of Bahli and Rivard (2001) we aim at answering the following questions: (1) ‘how does the design of the outsourcing contract impact on outsourcing risk?’ and (2) ‘how, in turn, does outsourcing risk affect outsourcing success?’. Based on multiple case studies of Business Process Outsourcing (BPO) arrangements, our results show that the ‘complementarity’ of contract clauses — Service Level Agreements, PenaltyReward-Systems, and Pricing — is important to contractually implement risk mitigation. Furthermore, by synchronizing the objectives of the inand outsourcer ex ante resulting in specific contract clauses which compensate for losses ex post, the existence of risk and its impact on outsourcing success can be limited.