A disadvantage of using a short-term contract as an option on the make-or-buy spectrum is that the providing firm has little incentive to make transaction-specific investments.
What is the short-term contract?
- A short-term contract is one that lasts no longer than 24 months.
- Short-term contracts give you more freedom.
- We risk losing the contract or disappointing your client if we need to take a short break from your work.
- We can simply complete our obligations and take time off with a short-term contract.
- A disadvantage of using a short-term contract as an alternative on the make-or-buy spectrum is that the supplying firm has little incentive to make transaction-specific investments.
- The supplier and buyer cannot breach or renegotiate the first-period offer under long-term contracts.
- As a result, in period 2, the supplier offers the same contract as in period 1.
- The short-term contracts have a one-year term.
- As a consequence, its supplier and buyer sign a new contract each period.
Therefore, one disadvantage of using a short-term contract as an alternative on the make-or-buy continuum is that the supplying firm has little incentive to make transaction-specific investments.
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