Contracting service outsourcing with objective and subjective performance metrics

In service outsourcing, the phenomenon of poor subjective performance abounds. Because the subjective metrics, albeit listed in the contract, are rarely linked with the final payment as the objective ones, they are less likely to obtain sufficient efforts to reach the optimal performance. In this paper, we introduce a categorical overall subjective assessment into the traditional contracts. Based on the contract theory, we compare the objective-metrics-based contract and first-best situation, and then analyse the optimal performance for service outsourcing and the reward and punishment mechanism for subjective performance changes. We suggest the situations where the subjective requirements are needed and also provide some fundamental principles for stipulation. Then, we design the contract based on both objective and subjective metrics to provide some incentives for subjective performance without compromising the conventional objective one. We show optimal objective incentive factor needs to be modified with subjective requirement for better outsourcing results.