Relative Performance Evaluation in Business Process Outsourcing Contract

Business process outsourcing is devising a contract with external vendor providing a business process based on defined performance criteria. BPO contract faces the problem of ineffectiveness because of the moral risks in asymmetric information. In this paper, we introduce the internal business process performance into the contract and compare the effectiveness of optimal efforts level, optimal incentive and agent costs saving without and with relative performance evaluation. The results of game model find the conditions in which relative performance evaluation can effectively increase the incentive of BPO contract and the criteria to choose internal business process to do relative performance evaluation.