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Abstract
Outsourcing is the contracting of various information systems' sub-functions by user firms to outside information systems vendors. A critical factor in the outsourcing process is the bidding and vendor selection mechanism. A bidding mechanism is proposed to reduce expected outsourcing costs in the final bidding and vendor selection process. Outsourcing contracts of routine and repetitive activities such as maintenance and operation of telecommunication networks is examined. A realistic scenario is examined, wherein multiple vendors bid for such contracts and where one vendor has cost and expertise advantages over other vendors and as a result tends to inflate bids. A mixed integer programming model is formulated for a multiple vendor scenario. In general, the results suggest a prescription that calls for the use of carrot and stick policies by the user firm. Subsidies need to be used as incentives for bidders to announce their most competitive bids. In addition, penalties have to be levied in order to pressure bidders not to bid too high.