Single Sourcing versus Multisourcing: The role of effort interdependence, metric-outcome misalignment, and incentive design
Submitted to journal and currently under revision.
We compare two strategies for outsourcing the development of information services projects: multisourcing and single-sourcing. We model these sourcing strategies when incentive contracts are based on a verifiable project metric that may or may not be aligned with the project outcome. We also model the interdependence of client and vendor efforts so that the verifiable metric may or may not be separable in these efforts. When the verifiable metric and the project outcome are aligned, single-sourcing performs better than multisourcing if the client and vendor efforts are interdependent, and as well as multisourcing if the efforts are independent. When the metric and outcome are misaligned: (i) multisourcing performs better than single-sourcing if the client effort is independent of the vendor efforts; (ii) the choice of sourcing strategy is nuanced based on the trade-off between the degree of misalignment and moral hazard if the client and vendor efforts are interdependent.