Outsourcing incentives

Unlike end-to-end systems, pay-as-you-go systems place substantial decision-making and outsourcing responsibilities in the hands of sponsors. 1 begin by asking what incentive mechanisms a pay-as-you-go sponsor is likely to adopt. 1 then turn to potential problems that might make pay-as-you-go less efficient than comparably funded end-to-end strategies. 

This sale and back-lease model is applied by many other pharmaceutical companies. It enables the company to dispose of assets without being forced to lay off employees. The net effect for the industry as a whole is that statistically, the share of outsourcing is increasing. However, the problem of underutilized capacity persists. For a hne-chemical company, the acquisition of an API plant from a pharma company is problematic. Once the supply contract, offered by the pharma company as an incentive for the acquisition, expires, the problem arises as to what the capacity should be used for. This is all the more the case as the plants usually are designed to manufacture just one product and therefore are not truly multipurpose. Last but not least, the plants have been run as cost centers and the implementation of a lean production... 

Corporate human resources should ensure conformity in standards across the businesses - for example, in employee evaluation processes, incentive plans, benefit plans, and training pohcies. As in other functions, aU operational tasks should be outsourced or operated as shared services at SBU level - for example, payroll, human resources information systems, a database on internal job opportunities, or the administration of benefit plans. The center should be active in developing top talent across the businesses, and it should run the goldfish pool for internal top talent and the company s program for recmiting experienced persoimel. This responsibility also includes the early identification of skills needed by the entire organization, for example, e-commerce skills to kick-start new businesses. The center must also act as a repository of expertise on internal and external best practices in talent management... 

On the other hand, a networked economy is a mixture of firms that is not restricted by internal hierarchies and markets and does not favor controlled coordination like an assembly line. Businesses operating in this virtual marketplace lack incentives to maintain long-term relationships—based on corporate ownership or contracts—with a few suppliers or partners. Increasingly, internal functions are outsourced to any number of firms and individuals in a globally dispersed market. 

As companies outsource, they quickly learn that relationships matter. The nodes of the network are only as effective as the trading partner relationship. As a result, the sharing of information and the alignment of incentives increase in importance. This is the mortar between the bricks. 

In parallel, companies have become more dependent on third-party trading relationships. Outsourced manufacturing and logistics are today s reality. Companies today find that they need to plan globally to execute locally across a diverse network bidirectionally yet, the functional leaders are not incented to build value networks. To effectively plan, companies need to value the important, but the metrics reward the urgent. 

There are numerous systems where the infinite server principal-agent model is relevant. Cachon and Harker (1999) provide two nice examples, one in PC banking and one in DelTs customer service. A third example is in health services where Health Maintenance Organizations (HMO) or government insurance agencies outsource the delivery of clinical services to specialized providers, and they wish to structure incentive contracts that will motivate the private providers to adopt cost-effective clinical decisions that maximize patient survival (Zweifel and Breyer, 1997). 

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