Management of Information Systems Outsourcing: A Bidding Perspective

Abstract:

Outsourcing is the contracting of various information systems’ subfunctions by user firms to outside information systems vendors. A critical factor in the outsourcing process is the bidding and vendor selection mechanism. This paper describes the process of outsourcing and identifies the various stages involved. Subsequently, considering that cost reduction is a driving force of outsourcing for user-firms, this paper proposes a bidding mechanism to reduce expected outsourcing costs in the final bidding and vendor selection process. The paper studies outsourcing contracts of routine and repetitive activities such as maintenance and operation of telecommunication networks. A realistic scenario is studied, wherein multiple vendors bid for such contracts and where one vendor has cost and expertise advantages over other vendors and as a result tends to inflate bids. A mixed integer programming model is formulated for a multiple vendor scenario. In general, the results suggest a prescription that calls for the use of “carrot and stick” policies by the user firm. Subsidies (the carrot) need to be used as incentives for bidders to announce their most competitive bids. In addition, penalties (the stick) have to be levied in order to pressure bidders not to bid high.

Key Words and Phrases::

• bidding mechanisms
• information systems management
• mixed integer programming
• outsourcing of information systems

Additional information

Notes on contributors

A. Chaudhury

A. Chaudhury is Assistant Professor of MIS at the University of Masachusetts at Boston. He graduated from the Krannert Graduate School of Management, Purdue University, in 1989. His publications have appeared in varied journals such as IEEE Transactions on Systems, Man and Cybernetics, IEEE Transactions on Data and Knowledge Engineering, Information Systems Research, International Journal of Production Research, and others.

Kichan Nam

Kichan Nam is a faculty member in the Department of Information Systems at Queensland University of Technology, Australia. He holds a Ph.D from the State University of New York at Buffalo. Outsourcing is one of his major research topics. Another major research interest is telecommunications. He has published papers in the European Journal of Operational Research, International Conference on Information System (ICIS) Proceedings, and other major international conference proceedings.

H. Raghav Rao

H. Raghav Rao is an Associate Professor of Management Systems at the State University of New York at Buffalo. He graduated from the Krannert Graduate School of Management, Purdue University, in December 1987. Since then he has published over thirty archival journal articles in journals such as Communications of the ACM, Discrete Applied Mathematics, Decision Support Systems, IEEE Tansactions on Systems, Man and Cybernetics, MIS Quarterly, and others. He is currently editor of the special issue of the Annals of Operations Research on the Information Systems and Operations Research interface.