Managing Information Intensive Service Facilities: Executive Contracts, Market Information, and Capacity Planning

Abstract

Effectively managing IT service centers such as call centers, computerized diagnostic imaging facilities, data centers, e-commerce sites, SaaS, and telecommunication networks has always been a challenging task, especially, when the managers running the centers possess private information about market condition and their marketing efforts. Prior studies often model IT service centers as queueing systems with exogenous demand and mostly focus on capacity allocation through an internal pricing scheme. Demand uncertainty and managers' private information (i.e., agency issues) are usually ignored. For service centers in general, customers often experience delays due to stochastic arrivals and random service times. Successfully soliciting market information from the managers becomes critical for the centers' profitability. If firms invest too much in capacity, while delay costs are under control capacity costs go up. If firms under-invest in capacity then delay costs explode. Because managers' information regarding market demand is valuable for the firms, how to solicit true market information and thereby induce desired levels of marketing effort from the managers becomes critical and is the focus of this paper. We present two incentive contracts that can effectively induce true market information from the managers. We show that one contract can even induce the first-best effort levels from the managers. Our study provides guidelines for firms that deal with congestion-prone systems with incomplete information, and it sheds light on how to effectively manage service facilities with combined moral hazard and adverse selection issues.