Beyond the agency theory in regulation of relationship between a client and contractor in professional service projects

Many companies are dependent on purchasing the required professional services (such as managerial, marketing, accounting, legal, and IT services) from specialist contractors. The contract between such contractors and clients forms an agency relationship, so the agency theory may be used to regulate the relationship between them. However, since the abstract knowledge is the subject of exchange between the client and professional service provider and there is a knowledge asymmetry between these two parties, the application of agency theory as it is used for traditional owner-manager agency relationship is not possible for principal-professional agent relations. In this article, we expand the agency theory to be applicable in such agency relationships. We suggest that a combination of behavior-based and outcome-based contracts be employed in principal-professional agent relationships, if possible. Moreover, we discuss why it is very hard or even impossible to have a direct control over professional service contractor and to measure the outcomes of its services. We finally propose two alternative mechanisms (1-trust and self-control, and 2-indirect control) for reducing opportunistic behaviors and solving some agency problems occurring in principal-professional agent relations.