| Optimizing Investment in Standardization in the Context of Outsourcing ? A Game-Theoretical Approach (2009) | |||||||||||
Abstract | |||||||||||
| Due to scale effects, outsourcing a standardized business process costs less than outsourcing aspecific one. For companies running individual processes supported by legacy software, the questionis whether an investment in standardizing that process prior to outsourcing is efficient. We model thisproblem as a multi stage game and derive the following results: Firstly, it is ex ante rational to investin standardization to reduce the lock in with the internal provider. Secondly, the prices of the serviceproviders do not matter for the ex ante investment decision. Thirdly, the price gap between internaland external provider will reflect exactly the lock-in in the form of switching costs.We use an extensive game to model the multi period decision problem and then combine backwardinduction and optimization to find the optimal investment decision.The principal implication of our research is the guidance we provide on which information isnecessary for the standardization and outsourcing decisions at each stage of the game.We are not aware of any prior work analyzing the interdependence between standardization andoutsourcing that gives clear guidance on which information is necessary for an optimal decision. | |||||||||||
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