Information Systems Frontiers

, Volume 12, Issue 2, pp 185–205 | Cite as

Structure of service level agreements (SLA) in IT outsourcing: The construct and its measurement

Article
First Online:
Received:
Accepted:

Abstract

The increased reliance of companies on IT outsourcing has turned management attention to a set of skills of managing relationships with service providers. While some recent studies have shown that the contracting ability to effectively manage relational exchanges can improve various dimensions of organizational performance, there has been relatively little analysis of how firms strategically use contracts to successfully manage their interfirm relationships. As an extension of past studies emphasizing the importance of the contract and service level agreements (SLA), the study develop an inclusive and conceptually sound framework for structuring SLA in IT outsourcing arrangements drawing upon control theory. Along with a careful description of measurement development as well as rigorous statistical validations, it contributed to instrument development for a set of 11 first-order SLA contractual factors and their relationships with three second-order substantive factors. The results of the study are framed as a tool for benchmarking SLA structuring efforts as well as a foundation for the future study of managing IT outsourcing relationships. The study suggests empirically testing of (1) the complementarity or substitutability between formal contract and relational governance, (2) institution based trust as an initial trust building mechanism, and (3) IT outsourcing success from a contractual perspective as potential areas of future research using the results of the study.

Keywords

IT outsourcing relationships Control theory Service level agreements (SLA) Measurement development Second-order construct 
This is a preview of subscription content, log in to check access.

References

  1. Alborz, S., Seddon, P. B., & Scheepers, R. (2004). Impact of configuration on IT outsourcing relationships. In Proceedings of the Tenth Americas Conference on Information Systems (AMCIS), New York, NY, pp. 3551–3560.Google Scholar
  2. Anderson, J. C., & Gerbing, D. W. (1988). Structural equation modeling in practice: A review and recommended two-step approach. Psychological Bulletin, 103(3), 411–423.CrossRefGoogle Scholar
  3. Anderson, J. C., & Narus, J. A. (1990). A model of distributor firm and manufacturer firm working partnerships. Journal of Marketing, 54(1), 42–58.CrossRefGoogle Scholar
  4. Ang, S., & Beath, C. M. (1993). Hierarchical elements in software contracts. Journal of Organizational Computing, 3(3), 329–361.CrossRefGoogle Scholar
  5. Aubert, B. A., Patry, M., & Rivard, S. (2005). A framework for information technology outsourcing risk management. Database for Advances in Information Systems, 36(4), 9–28.Google Scholar
  6. Baker, G., Gibbons, R., & Murphy, K. J. (2002). relational contracts and the theory of the firm. The Quarterly Journal of Economics, 117, 39–83.CrossRefGoogle Scholar
  7. Bendor-Samuel, P. 1999. Crafting a better outsourcing contract: Everest Group, Inc.Google Scholar
  8. Bentler, P. M. (1990). comparative fit indexes in structural models. Psychological Bulletin, 107(2), 238–246 (June).CrossRefGoogle Scholar
  9. Bollen, K. A. (1989). Structural equations with latent variables. New York: Wiley.Google Scholar
  10. Brickley, J. A. (1999). Incentives, conflicts and contractual restraints: Evidence from franchising. Journal of Law and Economics, 42(2), 745–774.CrossRefGoogle Scholar
  11. Browne, M. W., & Cudeck, R. (1993). Alternative ways of assessing model fit. In K. A. Bollen, & J. S. Long (Eds.) Testing structural equation models (pp. 136–162). Newbury Park, CA: Sage.Google Scholar
  12. Choudhury, V., & Sabherwal, R. (2003). Portfolios of control in outsourced software development project. Information Systems Research, 14(3), 291–341.CrossRefGoogle Scholar
  13. Clark, T., Zmud, R. W., & McCray, G. (1998). The outsourcing of information services: Transforming the nature of business in the information industry. In L. P. Wilcocks, & M. Lacity (Eds.) Strategic sourcing of information systems. New York: Wiley.Google Scholar
  14. Deutsch, M. (1973). The resolution of conflict: Constructive and destructive processes. New Haven: Yale University Press.Google Scholar
  15. Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: A survey and analysis of the literature. Database for Advances in Information Systems, 35(4), 6–102.Google Scholar
  16. DiRomualdo, A., & Gurbaxani, V. (1998). Strategic intent for IT outsourcing. Sloan Management Review, 39(4), 67–80.Google Scholar
  17. Doll, W. J., Xia, W., & Torkzadeh, G. (1994). A confirmatory factor analysis of the end-user computing satisfaction instrument. MIS Quarterly, 18(4), 459–468.CrossRefGoogle Scholar
  18. Dwyer, F. R., Schurr, P. H., & Oh, S. (1987). Developing buyer–seller relationships. Journal of Marketing, 51(2), 11–27.CrossRefGoogle Scholar
  19. Dyer, J. H., & Singh, H. (1998). The relational view: Cooperative strategy and sources of interorganizational competitive advantage. Academy of Management Review, 23(4), 660–679.CrossRefGoogle Scholar
  20. Eisenhardt, K. M. (1985). Control: Organizational and economic approaches. Management Science, 31(2), 134–149.CrossRefGoogle Scholar
  21. Fitzgerald, G., & Willcocks, L. (1994). Contracts and partnerships in the outsourcing of IS. In Proceedings of the Fifteenth International Conference on Information Systems, pp. 91–98.Google Scholar
  22. Fontenot, R. J., & Wilson, E. J. (1997). Relational exchange: A review of selected models for a prediction matrix of relationship activities. Journal of Business Research, 39(1), 5–12.Google Scholar
  23. Fornell, C., & Larcker, D. F. (1981). Evaluating Structural Equation Models with Unobservable Variables and Measurement Error. Journal of Marketing Research, 18, 39–50.CrossRefGoogle Scholar
  24. Gefen, D., Pavlou, P., Benbasat, I., McKnight, H., Stewart, K., & Straub, D. W. (2006). ICIS panel summary: Should institutional trust matter in information systems research? Communications of the Association for Information Systems, 17, 205–222.Google Scholar
  25. Gefen, D., Straub, D. W., & Boudreau, M.-C. (2000). Structural equation modeling and regression: Guidelines for research practice. Communications of the AIS, 4(7), 1–77.Google Scholar
  26. Granovetter, M. (1985). Economic action and social structure. American Journal of Sociology, 91, 481–493.CrossRefGoogle Scholar
  27. Grossman, S. J., & Hart, O. D. (1986). The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy, 94(4), 691–719.CrossRefGoogle Scholar
  28. Grover, V., Cheon, M. J., & Teng, J. T. C. (1996). The effect of service quality and partnership on the outsourcing of information systems functions. Journal of Management Information Systems, 12(4), 89–116.Google Scholar
  29. Gulati, R. (1995). Does familiarity breed trust? The implications of repeated ties for contractual choices in alliances. Academy of Management Journal, 38(1), 85–112.CrossRefGoogle Scholar
  30. Hair, J. F. (1998). Multivariate data analysis. Upper Saddle River, NJ: Prentice Hall.Google Scholar
  31. Hart, O. (1988). Incomplete contracts and the theory of the firm. Journal of Law, Economics, and Organization, 4(1), 119–139.Google Scholar
  32. Heide, J. B. (1994). Interorganizational governance in marketing channels. Journal of Marketing, 58(1), 71–86.CrossRefGoogle Scholar
  33. Huber, G. P., & Power, D. J. (1985). Research notes and communications retrospective reports of strategic-level managers: Guidelines for increasing their accuracy. Strategic Management Journal, 6, 171–180.CrossRefGoogle Scholar
  34. Hufnagel, E. M., & Conca, C. (1994). User response data: The potential for errors and biases. Information Systems Research, 5(1), 48–73 (March).CrossRefGoogle Scholar
  35. Hung, P. C. K., Chiu, D. K. W., Fung, W. W., Cheung, W. K., Wong, R., Choi, S. P. M., et al. (2007). End-to-end privacy control in service outsourcing of human intensive processes: A multi-layered web service integration approach. Information Systems Frontiers, 9(1), 85–101.CrossRefGoogle Scholar
  36. Jaworski, B. J. (1988). Toward a theory of marketing control: Environmental context, control types, and consequences. Journal of Marketing, 52(3), 23–44.CrossRefGoogle Scholar
  37. Jaworski, B. J., Stathakopoulos, V., & Krishnan, H. S. (1993). Control combinations in marketing: Conceptual framework and empirical evidence. Journal of Marketing, 57(1), 57–69.CrossRefGoogle Scholar
  38. Jöreskog, K. G. (1993). Testing structural equation models. In K. A. Bollen, & J. S. Long (Eds.) Testing structural equation models. Newbury Park, CA: Sage.Google Scholar
  39. Karten, N. (2004). With service level agreements, less is more. Information Systems Management, 21(4), 43–44.CrossRefGoogle Scholar
  40. Kern, T. (1997). The gestalt of an information technology outsourcing relationship: An exploratory analysis. In Proceedings of the Proceedings of the Eighteenth International Conference on Information Systems, Atlanta, GA, pp. 37–58.Google Scholar
  41. Kern, T., & Blois, K. (2002). Norm development in outsourcing relationships. Journal of Information Technology, 17(1), 33–42.CrossRefGoogle Scholar
  42. Kern, T., & Willcocks, L. (2002). Exploring relationships in information technology outsourcing: The interaction approach. European Journal of Information Systems, 11(1), 3–19.CrossRefGoogle Scholar
  43. Kern, T., Willcocks, L. P., & Heck, E. V. (2002). The winner’s curse in IT outsourcing: Strategies for avoiding relational trauma. California Management Review, 44(2), 47.Google Scholar
  44. Kirsch, L. J. (1997). Portfolios of control modes and IS project management. Information Systems Research, 8(3), 215–239.CrossRefGoogle Scholar
  45. Kishore, R., Rao, H. R., Nam, K., Rajagopalan, S., & Chaudhury, A. (2003). A relationship perspective on IT outsourcing. Communications of the ACM, 46(12), 86–92.CrossRefGoogle Scholar
  46. Klein, B., Crawford, R., & Alchian, A. (1978). Vertical integration, appropriable rents, and the competitive contracting process. Journal of Law and Economics, 21, 297–321.CrossRefGoogle Scholar
  47. Klepper, R. J., & Jones, W. O. (1998). Outsourcing information technology, systems, and services. New Jersey: Prentice-Hall.Google Scholar
  48. Kline, R. B. (1998). Principles and practice of structural equation modeling. New York: Guilford.Google Scholar
  49. Kumar, N., Stern, L. N., & Anderson, J. C. (1993). Conducting interorganizational research using key informants. Academy of Management Journal, 36(6), 1633–1651.CrossRefGoogle Scholar
  50. Lacity, M. C., & Hirschheim, R. (1993). Information systems outsourcing: Myths, metaphors, and realities. New York: Wiley.Google Scholar
  51. Lacity, M. C., & Willcocks, L. P. (1998). An empirical investigation of information technology sourcing practices: Lessons from experience. MIS Quarterly, 22(3), 363–408.CrossRefGoogle Scholar
  52. Lee, J.-N., Huynh, M. Q., Kwok, R. C.-W., & Pi, S.-M. (2003). IT outsourcing evolution: Its past, present, and future. Communications of the ACM, 46(5), 84–89.CrossRefGoogle Scholar
  53. Lee, J.-N., & Kim, Y.-G. (1999). Effect of partnership quality on IS outsourcing: Conceptual framework and empirical validation. Journal of Management Information Systems, 15(4), 29–61.Google Scholar
  54. Lee, J.-N., Miranda, S. M., & Kim, Y.-M. (2004). IT outsourcing strategies: Universalistic, contingency, and configurational explanations of success. Information Systems Research, 15(2), 110–131.CrossRefGoogle Scholar
  55. Lewicki, R., & Bunker, B. (1996). Developing and maintaining trust in work relationships. In R. Kramer, & T. Tyler (Eds.) Trust in organizations (pp. 114–139). Thousand Oaks, Calif.: Sage Publications.Google Scholar
  56. Macneil, I. R. (1978). Contracts: Adjustment of long-term economic relations under classical, neoclassical, and relational contract law. Northwestern University Law Review, 72, 854–905.Google Scholar
  57. Macneil, I. R. (1980). The new social contract, an inquiry into modern contractual relations. New Heaven: Yale University Press.Google Scholar
  58. Marcolin, B. L. (2002). Spiraling effect of IS outsourcing contract interpretations. In R. Hirschheim, A. Heinzl, & J. Dibbern (Eds.) Information systems outsourcing in the new economy. New York: Springer.Google Scholar
  59. Marsh, H. W., & Hocevar, D. (1985). Application of confirmatory factor analysis to the study of self-concept: First and higher order factor models and their invariance across groups. Psychological Bulletin, 97(3), 562–582.CrossRefGoogle Scholar
  60. Matlus, R., & Brittain, K. (2002). Creating a service-level agreement for the IS organization: Gartner Group.Google Scholar
  61. Maurer, W. (2001). IT services contracts – measurement charter: Gartner Group.Google Scholar
  62. Maurer, W., Ambrose, C., & Stone, L. (2001). IT services contracts – SOW, service levels and price: Gartner Group.Google Scholar
  63. Mayer, K. J., & Argyres, N. S. (2004). Learning to contract: Evidence from the personal computer industry. Organization Science, 15(4), 394–410.CrossRefGoogle Scholar
  64. McKnight, D. H., Cummings, L. L., & Chervany, N. L. (1998). Initial trust formation in new organizational relationships. Academy of Management Review, 23(3), 473–490.CrossRefGoogle Scholar
  65. Mingay, S., & Govekar, M. (2002). ITIL’s service-level management strength is in integration. TG-15-3491. Stamford, CT: Gartner Group.Google Scholar
  66. Mohr, J., & Spekman, R. (1994). Characteristics of partnership success: Partnership attributes, communication, behavior, and conflict resolution techniques. Strategic Management Journal, 15(2), 135–152.CrossRefGoogle Scholar
  67. Niederman, F., Kundu, S., & Salas, S. (2006). IT software development offshoring: A multi-level theoretical framework and research agenda. Journal of Global Information Management, 14(2), 52–74.Google Scholar
  68. Ouchi, W. G. (1979). A conceptual framework for the design of organizational control mechanisms. Management Science, 25(9), 833–848.CrossRefGoogle Scholar
  69. Pinsonneault, A., & Kraemer, K. L. (1993). Survey research methodology in management information systems: An assessment. Journal of Management Information Systems, 10(2), 75–105 (Fall).Google Scholar
  70. Poppo, L., & Zenger, T. (2002). Do formal contracts and relational governance function as substitutes or complements? Strategic Management Journal, 23(8), 707–725.CrossRefGoogle Scholar
  71. Ring, P., & Van de Ven, A. (1994). Developmental processes of cooperative interorganizational relationships. Academy of Management Review, 19(1), 90–118.CrossRefGoogle Scholar
  72. Sabherwal, R. (1999). The role of trust in outsourced IS development projects. Communications of the ACM, 42(2), 80–86.CrossRefGoogle Scholar
  73. Saunders, C., Gebelt, M., & Hu, Q. (1997). Achieving success in information systems outsourcing. California Management Review, 39(2), 63–79.Google Scholar
  74. Scardino, L. (2001). IT services contracts – process ownership plan: Gartner Group.Google Scholar
  75. Scardino, L. (2002). Managing your multisourced environment. COM-15-8098. Stamford, CT: Gartner Group.Google Scholar
  76. Segars, A. H., & Grover, V. (1998). Strategic information systems planning success: An investigation of the construct and its measurement. MIS Quarterly, 22(2), 139–163.CrossRefGoogle Scholar
  77. Shao, B. B., & David, J. S. (2007). The impact of offshore outsourcing on IT workers in developed countries. Communications of the ACM, 50(2), 89–94.CrossRefGoogle Scholar
  78. Singleton, J. P., McLean, E. R., & Altman, E. N. (1988). Measuring information systems performance: Experience with the management by results system at Security Pacific Bank. MIS Quarterly, 12(2), 325–337.CrossRefGoogle Scholar
  79. Stewart, K. A., & Segars, A. H. (2002). An empirical examination of the concern for information privacy instrument. Information Systems Research, 13(1), 36–49.CrossRefGoogle Scholar
  80. Stone, L. (2001). Beyond T&Cs: What must be included in services contracts. AV-14-3036. Stamford, CT: Gartner Group.Google Scholar
  81. Strauss, A., & Corbin, J. (1990). Basics of qualitative research: Grounded theory procedures and techniques. Newbury Park, CA: Sage.Google Scholar
  82. Tanriverdi, H., Konana, P., & Ge, L. (2007). The choice of sourcing mechanisms for business processes. Information Systems Research, 18(3), 280–299.CrossRefGoogle Scholar
  83. Tucker, L. G., & Lewis, C. L. (1973). The reliability coefficient for maximum likelihood factor analysis. Psychometrika, 38, 1–10.CrossRefGoogle Scholar
  84. Uzzi, B. (1997). Social structure and competition in interfirm networks: The paradox of embeddedness. Administrative Science Quarterly, 42(1), 35–67.CrossRefGoogle Scholar
  85. Venkatraman, N. (1989). Strategic orientation of business enterprises: The construct, dimensionality, and measurement. Management Science, 35(8), 942–962.CrossRefGoogle Scholar
  86. Williamson, O. E. (1979). Transaction costs economics: The governance of contractual relations. Journal of Law and Economics, 22, 233–361.CrossRefGoogle Scholar
  87. Williamson, O. E. (1985). The economic institutions of capitalism. New York: The Free Press.Google Scholar
  88. Williamson, O. E. (1991). Comparative economic organization: The analysis of discrete structural alternatives. Administrative Science Quarterly, 36, 269–296.CrossRefGoogle Scholar
  89. Williamson, O. E. (1996). The mechanisms of governance. New York, NY: Oxford University Press.Google Scholar
  90. Zucker, L. G. (1986). Production of trust: institutional sources of economic structure, 1840–1920. In B. M. Staw, & L. L. Cummings (Eds.) Research in organizational behavior (vol. 8, (pp. 53–111)). Greenwich, CT: JAI.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  1. 1.Information Technology and Operations Management, The Barry Kaye College of BusinessFlorida Atlantic UniversityBoca RatonUSA

Personalised recommendations