Interdependencies in IT Infrastructure Services: Analyzing Service Processes for Optimal Incentive Design

Information technology (IT) infrastructure outsourcing arrangements involve multiple services and processes that are interdependent. The interdependencies pose significant challenges in designing appropriate incentives to influence a provider's effort-allocation decisions. By integrating process modeling fundamentals with multitask agency theory, we enumerate the base set of possible interrelationships among different IT service processes and derive corresponding optimal incentives. Our results demonstrate the impacts of risk profile, random noise, value-cost ratio, and process structure on optimal incentive rates. We find that the current practice of treating IT services as essentially independent is optimal only in limited settings where both the service provider and customer are risk neutral. Interestingly, incongruent performance measures require optimal incentive rates to respond in complex ways to the strength of coupling between services and the complementarity and substitutability of services. We also analyze more complex process scenarios using different combinations of the base set. The results demonstrate that, while the findings from the base set largely hold, the value-cost ratio of the services and the performance measure congruity can pose unique challenges in determining incentive rates.