Incentive design with customer satisfaction for business process outsourcing: multi-task vs. multi-agent

Abstract

We study the incentive design decision of a firm that outsources its online marketing and operational business lines to professional external and internal service providers under the principalagent framework. Customer satisfaction is represented as the composite of the agents’ sales and quality-control efforts via the disconfirmation model, and is introduced into the demand model and incentive contracts. Two scenarios corresponding to whether the brand owner delegates business to a single agent or to multiple agents are studied. We derive the brand owner’s optimal contracts and the agents’ effort levels and conduct extensive sensitivity analyses regarding the influences of model parameters. We find that increases in the measure accuracy of customer satisfaction can bring significant benefit to the firm’s profitability, and explore how it is affected by system factors. Specifically, the benefit is more substantial when the marginal cost of quality-control effort is relatively smaller than the marginal cost of sales effort. An interesting discovery is that the brand owner always earns more profit by outsourcing business to multiple agents than to a single agent, mainly because of his inflexibility in reaching a balance between inducing higher effort levels and providing a sufficient risk premium in the singe-agent case. This profit gap can be expanded by incentivizing both agents on customer satisfaction measures, and is shown quite significant under certain settings in the numerical studies.