Reducing Transactional Risk via Prototyping in Design Outsourcing

Design outsourcing is gaining popularity in many industries, such as electronics, air-craft, and automobile etc. Due to its innovative and unpredictable nature, design out-sourcing bears more risks in transaction than traditional manufacturing and service outsourcing. In this context, transactional risk is defined as the risks resulted from in-herent uncertainty regarding the design outcome faced by both buyers and sellers. Pro-totypes are commonly used in design outsourcing to elicit customers¿ needs and convey designers¿ capabilities, such that the information asymmetry and transactional risk would be reduced. However, in capital intensive industries, such as pharmaceutical, and aerospace, etc., prototypes are usually very expensive. Three quantitative models are developed in this research to analyze the trade-off between the value and cost of prototyping in three different, but progressive design outsourcing scenarios: (1) one buyer vs. one designer through single prototyping phase, (2) one buyer vs. one design-er through multiple prototyping phases, and (3) one buyer vs. multiple designers through multiple prototyping phases.