The impact of business process modularity on relational contract in the outsourcing of two business processes

How to successfully govern the alliances of business process outsourcing (BPO) is worthy of research. This paper studies the impact of business process modularity on relational contract when two unverifiable business processes are outsourced, by modeling a repeated game. The results show that, enhancing business process modularity improves the sustainability of relational contract in BPO, and the client´s payoff. When the relational contract is first best, business process modularity will not affect the optimal bonus which is a constant, and when the relational contract is second best, higher business process modularity is associated with a higher bonus.