Knowledge sharing and cooperation in outsourcing projects – a game theoretic analysis

The popular notion of outsourcing is that it helps organizations cut down costs of operation. In reality, however, firms often outsource to organizations that possess complex, complementary skills. We model the interaction between employees of the ‘host’ firm and the outsourcing firm, who have to share their knowledge and skill sets in order to work effectively as a team, but might be naturally antagonistic towards each other. The analysis shows that when the degree of complementarity of knowledge between the employees is high enough, better payoffs can be achieved if the top management enforces cooperation between the employees. In these situations, the involvement of the top management extends far beyond negotiating the contract to make the outsourcing successful.