Abstract
The information systems outsourcing market has seen rapid growth. Companies are increasingly choosing to outsource many of their information systems activities to services firms rather than sourcing them internally. This trend is inconsistent with the predictions of some of the published literature which point to the high costs of using an outside market. These articles, based on transaction cost economics, point out the difficulty of writing efficient contracts in the face of high transaction costs which result from the considerable technological and business uncertainty in a typical outsourcing arrangement. Yet, the growth in the outsourcing market clearly indicates that the economics of external provision are dominating these contractual concerns. Given that companies are outsourcing information systems services through multi-year contracts, economic theory suggests that outsourcing contracts will seek to minimize the associated transaction costs. I propose a framework for the analysis of information systems outsourcing contracts based on transaction cost theory and the economics of production of information systems services. Based on this framework I develop propositions related to the contractual elements likely to be observed in outsourcing contracts. I test the predictions of the model by studying ten outsourcing contracts in detail. The results indicate that contracts are designed to mitigate transaction costs, and that transaction cost economics is a useful lens with which to analyze an IT services sourcing arrangement.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Adler, P., 2001. “Market, Hierarchy and Trust: The Knowledge Economy and the Future of Capitalism.” Organization Science 12(2): 214–234.
Alpar, P. and A. Saharia, 1995. “Outsourcing Information Systems Functions: An Organizational Economics Perspective.” Journal of Organizational Computing 5(3): 197–217.
Ang, S. and C. Beath, 1993. “Hierarchical Elements in Software Contracts.” Journal of Organizational Computing 3(3): 329–361.
Ang, S. and L. Cummings, 1997. “Strategic Response to Institutional Influences on Information Systems Outsourcing.” Organization Science 8(3): 235–255.
Ang, S. and D. Straub, 1998. “Production and Transaction Economies and IS Outsourcing: A Study of the U.S. Banking Industry.” MIS Quarterly 22(4): 535–552.
Apte, U., 1990. “Global Outsourcing of Information Systems and Processing Services.” The Information Society 7(4): 287–303.
Banerjee, A. and E. Duflo, 2000. “Reputation Effects and the Limits of Contracting: A Study of the Indian Software Industry.” Quarterly Journal of Economics 115(3): 989–1017.
Boerner, C. and J. Macher, 2001. “Transaction Cost Economics: An Assessment of Empirical Research in the Social Sciences.” Working Paper, University of California, Berkeley.
Coase, R., 1937. “The Nature of the Firm.” Economica 4(16): 386–405.
Coase, R., 1992. “The Institutional Structure of Production.” American Economic Review 82(4): 713–719.
Clemons, E., L. Hitt, and E. Snir, 2000. “A Risk Analysis Framework for IT Outsourcing.” Working Paper, The Wharton School, University of Pennsylvania (October).
DiRomualdo, A. and V. Gurbaxani, 1998. “Strategic Intent for IT Outsourcing.” Sloan Management Review 39(4): 67–80.
Fitzgerald, G. and L. Willcocks, 1994. “Contracts and Partnerships in the Outsourcing of IT.” Proceedings of the International Conference on Information Systems, Vancouver, BC, Canada: 91–98.
Gartner Dataquest, 2003. “Worldwide IT Services Market Definitions Guide, 2Q03.” Gartner Dataquest Guide, Stamford, CT (August).
Goldberg, V. and J. Erickson, 1987. “Quantity and Price-Adjustment in Long-Term Contracts: A Case Study of Petroleum Coke.” Journal of Law and Economics 30(2): 369–398.
Gopal, A., K. Sivaramakrishnan, M. Krishnan, and T. Mukhopadhyay, 2003. “Contracts in Offshore Software Development: An Empirical Analysis.” Management Science 49(12): 1671–1683.
Grover, V., M. Cheon, and J. Teng, 1996. “The Effect of Service Quality and Partnership on the Outsourcing of Information Systems Functions.” Journal of MIS 12(4): 89–116.
Gurbaxani, V., 1990. Software-Hardware Tradeoffs and Information Systems Budgets. Washington DC: ICIT Press.
Gurbaxani, V. and H. Mendelson, 1987. “Software-Hardware Tradeoffs and Data Processing Budgets.” IEEE Transactions on Software Engineering SE-13 (September): 1010–1017.
Gurbaxani, V. and S. Whang, 1991. “The Impact of Information Systems on Organizations and Markets.” Communications of the ACM 34(1): 59–73.
Hamel, G. and C. Prahalad, 1990. “The Core Competence of the Corporation.” Harvard Business Review 68(3): 79–91.
Hart, O. and J. Moore, 1999. “Foundations of Incomplete Contracts.” The Review of Economic Studies 66(1): 115–138.
Huber, R., 1993. “How Continental Bank Outsourced its Crown Jewels.” Harvard Business Review (January–February) 71(1): 121–129.
Joskow, P., 1985. “Vertical Integration and Long-term Contracts: The Case of Coalburning Electric Generating Plants.” Journal of Law, Economics, and Organization 1(1): 33–80.
Joskow, P., 1987. “Contract Duration and Relationship-Specific Investments: Empirical Evidence from Coal Markets.” American Economic Review 77(1): 168–185.
Joskow, P., 1988. “Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence.” Journal of Law, Economics, and Organization 4(1): 95–117.
Kalnins, A. and K. Mayer, YEAR. “Relationships and Hybrid Contracts: An Analysis of Contract Choice in Information Technology.” Journal of Law, Economics, and Organization 20(1): 207–229.
Kern, T. and L. Willcocks, 1996. “The Enabling and Determining Environment: Neglected issues in an IT/IS Outsourcing Strategy.” European Conference on Information Systems, Lisbon, Portugal.
Kern, T. and L. Willcocks, 2000. “Contracts, Control and ‘Presentation’ in IT Outsourcing: Research in Thirteen UK Organizations.” Journal of Global Information Management (October–December) 8(4): 15–39.
Kern, T. and L. Willcocks, 2001. “The Relationship Advantage: Information Technologies, Sourcing, and Management.” Oxford, United Kingdom: Oxford University Press.
Klein, B., R. Crawford, and A. Alchian, 1978. “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process.” Journal of Law and Economics 21(2): 297–326.
Lacity, M. and R. Hirscheim, 1993. Information Systems Outsourcing: Myths, Metaphors and Realities. New York, NY: John Wiley and Sons.
Lacity, M. and R. Hirscheim, 1995. Beyond the Information Systems Outsourcing Bandwagon: The Insourcing Response. New York, NY: John Wiley and Sons.
Lacity, M., L. Willcocks, and D. Feeny, 1995. “IT Outsourcing: Maximize Flexibility and Control.” Harvard Business Review 73(3): 84–93.
Lacity, M., 2002. “Lessons in Global Information Technology Sourcing.” Computer 35(8): 26–33.
Loh, L. and N. Venkatraman, 1992. “Determinants of Information Technology Outsourcing: A Cross-Sectional Analysis.” Journal of Management Information Systems 9(1): 7–24.
Lyons, B., 1994. “Contracts and Specific Investment.” Journal of Economics and Management Strategy 3(2): 257–278.
Masten, S. and K. Crocker, 1985. “Efficient Adaptation in Long-Term Contracts: Takeor-Pay Provisions for Natural Gas.” American Economic Review 75(5): 1083–1093.
Masten, S., 1996. “Empirical Research in Transaction Cost Economics: Challenges, Progress, Directions.” In Groenewegen, J. (ed.), Transaction Cost Economics and Beyond. Boston, MA: Kluwer Academic Press, 43–64.
Milgrom, P. and J. Roberts, 1992. Economics, Organizations, and Management. Englewood Cliffs, NJ: Prentice Hall.
Nam, K., S. Rajagopalan, H. Rao, and A. Chaudhury, 1996. “A Two-Level Investigation of Information Systems Outsourcing.” Communications of the ACM 39(7):36–44.
Poppo, L. and T. Zenger, 2002. “Do Formal Contracts and Relational Governance Function as Substitutes or Complements?” Strategic Management Journal 23(8):707–725.
“Professional Services, First, Kill the Consultants.” BusinessWeek Online, 2002. www.businessweek.com (14 January).
Saunders, C., M. Gebelt, and Q. Hu, 1997. “Achieving Success in Information Systems Outsourcing.” California Management Review 39(2): 63–79.
Shelanski, H. and P. Klein, 1995. “Empirical Research in Transaction Cost Economics: a Review and Assessment.” Journal of Law, Economics and Organization 11(2): 335–361.
Strassmann, P., 1995. “Outsourcing: A Game for Losers.” Computerworld (21 August).
Strassmann, P., 2004. “Most Outsourcing is still a Game for Losers.” Computerworld (2 February).
Tapper, D., 2004. “Worldwide and U.S. IT Outsourcing Services 2004–2008 Forecast: A Potential Perfect Storm.” Report #31089, Framingham, MA: International Data Corporation (April).
Wholey, D., R. Padman, R. Hamer, and S. Schwartz, 2001. “Determinants of Information Technology Outsourcing.” Health Care Management Science 4(3): 229–239.
Williamson, O., 1985. The Economic Institutions of Capitalism. New York, NY: Free Press.
Young, A., 2004. “Outsourcing Market View:What the Future Holds.” Presentation at Gartner IT Services and Sourcing Summit, Las Vegas, NV (May).
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2007 Springer Science+Business Media, LLC
About this chapter
Cite this chapter
Gurbaxani, V. (2007). Information Systems Outsourcing Contracts: Theory and Evidence. In: Apte, U., Karmarkar, U. (eds) Managing in the Information Economy. Annals of Information Systems, vol 1. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-36892-4_4
Download citation
DOI: https://doi.org/10.1007/978-0-387-36892-4_4
Publisher Name: Springer, Boston, MA
Print ISBN: 978-0-387-34214-6
Online ISBN: 978-0-387-36892-4
eBook Packages: Business and EconomicsBusiness and Management (R0)