Open Access

ARTICLE

Strategic Contracting for Software Upgrade Outsourcing in Industry 4.0

Cheng Wang^1,2,*, Zhuowei Zheng¹

1 College of Mechanical Engineering, Zhejiang University of Technology, Hangzhou, 310014, China
2 Taizhou Research Institute, Zhejiang University of Technology, Taizhou, 318001, China

* Corresponding Author: Cheng Wang. Email:

(This article belongs to the Special Issue: Computing Methods for Industrial Artificial Intelligence)

Computer Modeling in Engineering & Sciences 2024, 138(2), 1563-1592. https://doi.org/10.32604/cmes.2023.031103

Received 14 May 2023; Accepted 06 July 2023; Issue published 17 November 2023

Abstract

The advent of Industry 4.0 has compelled businesses to adopt digital approaches that combine software to enhance production efficiency. In this rapidly evolving market, software development is an ongoing process that must be tailored to meet the dynamic needs of enterprises. However, internal research and development can be prohibitively expensive, driving many enterprises to outsource software development and upgrades to external service providers. This paper presents a software upgrade outsourcing model for enterprises and service providers that accounts for the impact of market fluctuations on software adaptability. To mitigate the risk of adverse selection due to asymmetric information about the service provider’s cost and asymmetric information about the enterprise’s revenues, we propose pay-per-time and revenue-sharing contracts in two distinct information asymmetry scenarios. These two contracts specify the time and transfer payments for software upgrades. Through a comparative analysis of the optimal solutions under the two contracts and centralized decision-making with full-information, we examine the characteristics of the solutions under two information asymmetry scenarios and analyze the incentive effects of the two contracts on the various stakeholders. Overall, our study offers valuable insights for firms seeking to optimize their outsourcing strategies and maximize their returns on investment in software upgrades.

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Keywords

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