Is the Business Model Broken? A Model of the Difference Between Pay-Now and Pay-Later Contracts in IT Outsourcing

Abstract

This chapter seeks to evaluate the dominant IT outsourcing contracts model (pay-later) as compared to an alternative model (pay-now) in light of changing economic conditions. We integrate practitioner observations in the spirit of mathematical transaction cost problems to develop a conceptual economic model to compare these two types of contracts. We uncover three very important facts which suggest that pay-now contracts are always at least as good as pay-later contracts, and pay-now contracts are better than pay-later contracts when economy is volatile. These findings provide a rich insight into the problem of failing IT outsourcing contracts since the prevailing poor state of economy. We further discuss the implications of our findings and suggest that simply shifting the contract from a pay-later to a pay-now will fix the IT outsourcing business model.