Delegating Innovation Projects with Deadline

What is it about?

In many contexts such as product design and development, advertising, and scouting for technical solutions, clients seek the expertise of external providers to generate innovative solutions for their business problems. Because innovation projects are beset with uncertainty, they often require multiple iterations of ideation and evaluation. Although some clients make a commitment to take the first feasible solution from the provider, other clients retain the flexibility to seek more solutions until they decide to stop the project. Which of these policies is the better way to delegate an innovation project?

Featured Image

Why is it important?

Our model-based analysis shows that although flexibility is appealing to the client, it demotivates the provider during the early stages of the project. Conversely, the committed stopping policy can induce the provider to exert costly effort early on, which results in a higher probability of yielding a feasible solution, as well as a higher expected quality of initial solutions. The committed policy is most valuable when the expertise of the provider is high or when the client’s cost of evaluating solutions is moderate. In addition, the committed policy is optimal when factors, such as provider’s capability and costs of effort, conspire to make the optimal payment high under the flexible stopping policy. In these circumstances, not using the committed policy (when it is optimal) could also lead to a significant reduction in the client’s profit.

Perspectives