Determinants of contract completeness for information technology outsourcing

  • Benoit A. Aubert
  • Jean Francois Houde
  • Suzanne Rivard
  • Michel Patry
Article

Abstract

This study developed and tested a model of the determinants of completeness of IT outsourcing contracts. The model is based on the assumption that the level of contract completeness results from a trade-off between the cost of developing a complete contract and the protection it offers. In contrast with outsourcing in many other sectors, IT outsourcing can be a temporary measure, with the anticipation that activities can be reintegrated in-house. This means that managers have to take into account the time horizon when deciding on the level of completeness of the contract. Results show that firms rely on more complete contracts when outsourcing is seen as a permanent approach. Also, transaction cost theory variables play multiple roles. Uncertainty reduces the level of completeness, while idiosyncrasy reduces partly the use of permanent outsourcing. Demand predictability, representing frequency, plays a dual role, increasing completeness but reducing the likelihood that outsourcing is used as a permanent solution.

Keywords

Outsourcing Contract IT characteristics Contract design 

References

  1. 1.
    Adler TR, Scherer RF, Barton SL, Katerberg R (1998) An empirical test of transaction cost theory: validating contract typology. J Appl Manag Stud 7(2):185Google Scholar
  2. 2.
    Alchian AA, Demsetz H (1972) Production, information costs, and economic organization. Am Econ Rev 65:777–795Google Scholar
  3. 3.
    Anderson SW, Dekker HC (2005) Management control for market transactions: the relation between transaction characteristics, incomplete contract design, and subsequent performance. Manage Sci 51(12):1734–1752CrossRefGoogle Scholar
  4. 4.
    Argyres NS, Bercovitz J, Mayer KJ (2007) Complementarity and evolution of contractual provisions: an empirical study of IT services contracts. Organ Sci 18(1):3–19CrossRefGoogle Scholar
  5. 5.
    Aubert BA, Houde JF, Patry M, Rivard S (2012) A multi-level investigation of information technology outsourcing. J Strateg Inf Syst 21(3):233–244CrossRefGoogle Scholar
  6. 6.
    Aubert BA, Patry M, Rivard S (2005) A framework for information technology outsourcing risk management. Data Base 36(4):9–28CrossRefGoogle Scholar
  7. 7.
    Aubert BA, Patry M, Rivard S (2004) A transaction cost model of IT outsourcing. Inf Manag 41(2004):921–932CrossRefGoogle Scholar
  8. 8.
    Aubert BA, Rivard S (2016) A Commentary on: “The role of transaction cost economics in information technology outsourcing research: a meta-analysis of the choice of contract type”. J Strateg Inf Syst 1(25):64–67CrossRefGoogle Scholar
  9. 9.
    Bahli B, Rivard S (2003) The information technology outsourcing risk: a transaction cost and agency theory-based perspective. J Inf Technol 18(3):211–221CrossRefGoogle Scholar
  10. 10.
    Balaji S, Brown CV (2014) Lateral coordination mechanisms and the moderating role of arrangement characteristics in information systems development outsourcing. Inf Syst Res 25(4):747–760CrossRefGoogle Scholar
  11. 11.
    Barthélemy J, Quelin BV (2006) Complexity of outsourcing contracts and ex post transaction costs: an empirical investigation. J Manage Stud 43(8):1775–1797CrossRefGoogle Scholar
  12. 12.
    Benaroch M, Dai Q, Kauffman RJ (2010) Should we go our own way? Backsourcing flexibility in IT services contracts. J Manag Inf Syst 26(4):317–358CrossRefGoogle Scholar
  13. 13.
    Bendor-Samuel P (2016) Why service level agreements are dead. CIO. www.cio.com/article/3064599/it-industry/why-service-level-agreements-are-dead.html. Accessed 7 May 2016
  14. 14.
    Carlton DW (1979) Vertical integration in competitive markets under uncertainty. J Ind Econ 27(3):189–209CrossRefGoogle Scholar
  15. 15.
    Chen Y, Bharadwaj A (2009) An empirical analysis of contract structures in IT outsourcing. Inf Syst Res 20(4):484–506CrossRefGoogle Scholar
  16. 16.
    Crocker KJ, Reynolds KJ (1993) The efficiency of incomplete contracts: an empirical analysis of air force engine procurement. Rand J Econ 24:126–146CrossRefGoogle Scholar
  17. 17.
    Dahl CA, Matson TK (1998) Evolution of the US natural gas industry in response to changes in transaction costs. Land Econ 74(3):390–408CrossRefGoogle Scholar
  18. 18.
    David RJ, Han SK (2004) A systematic assessment of the empirical support for transaction cost economics. Strateg Manag J 25(1):39–58CrossRefGoogle Scholar
  19. 19.
    Dibbern J, Goles T, Hirschheim R, Jayatilaka B (2004) Information systems outsourcing: a survey and analysis of the literature. ACM SIGMIS Database 35(4):6–102CrossRefGoogle Scholar
  20. 20.
    Doornik JA (2002) Object-oriented matrix programming using Ox, 3rd edn. Timberlake Consultants Press, London. www.doornik.com
  21. 21.
    Gopal A, Koka BR (2012) The asymmetric benefits of relational flexibility: evidence from software development outsourcing. MIS Q 36(2):553–576Google Scholar
  22. 22.
    Gopal A, Sivaramakrishnan K, Krishnan MS, Mukhopadhyay T (2003) Contracts in offshore software development: an empirical analysis. Manage Sci 49(12):1671–1683CrossRefGoogle Scholar
  23. 23.
    Hendrikse G, Windsperger J (2011) Determinants of contractual completeness in franchising. In: New developments in the theory of networks, contributions to management science, part 1. Springer, Berlin, pp 13–30Google Scholar
  24. 24.
    Higgins CA, Compeau DR, Meister DB (2007) From prediction to explanation: reconceptualizing and extending the perceived characteristics of innovating. J Assoc Inf Syst 8(8):26Google Scholar
  25. 25.
    Joskow PL (1985) Vertical integration and long-term contracts: the case of coal-burning electric generating plants. J Law Econ Organ 1(1):33–80Google Scholar
  26. 26.
    Joskow PL (1987) Contract duration and relationship-specific investments: empirical evidence from coal markets. Am Econ Rev 77(1):168–185Google Scholar
  27. 27.
    Karimi-Alaghehband F, Rivard S, Wu S, Goyette S (2011) An assessment of the use of transaction cost theory in information technology outsourcing. J Strateg Inf Syst 20(2):125–138CrossRefGoogle Scholar
  28. 28.
    Kim YJ, Lee JM, Koo C, Nam K (2013) The role of governance effectiveness in explaining IT outsourcing performance. Int J Inf Manage 33(5):850–860CrossRefGoogle Scholar
  29. 29.
    Krickx GA (2000) The relationship between uncertainty and vertical integration. Int J Organ Anal 8(3):309–329CrossRefGoogle Scholar
  30. 30.
    Lacity MC, Khan S, Yan A, Willcocks LP (2010) A review of the IT outsourcing empirical literature and future research directions. J Inf Technol 25:395–433CrossRefGoogle Scholar
  31. 31.
    Lacity MC, Willcocks LP, Feeny DF (1996) The value of selective IT sourcing. Sloan Manag Rev 37(3):13–25Google Scholar
  32. 32.
    Lee FC, Has H (1996) Évaluation quantitative des industries à forte concentration de savoir par rapport aux industries à faible concentration de savoir. In: Howitt P (ed) La croissance fondée sur le savoir et son incidence sur les politiques microéconomiques. University of Calgary Press, Industry CanadaGoogle Scholar
  33. 33.
    Leiblein MJ, Miller DJ (2003) An empirical examination of transaction-and firm-level influences on the vertical boundaries of the firm. Strateg Manag J 24(9):839–859CrossRefGoogle Scholar
  34. 34.
    Mani D, Barua A, Whinston AB (2013) Outsourcing contracts and equity prices. Inf Syst Res 24(4):1028–1049CrossRefGoogle Scholar
  35. 35.
    Macher JT, Richman BD (2008) Transaction cost economics: an assessment of empirical research in the social sciences. Bus Polit 10(1): 1–63CrossRefGoogle Scholar
  36. 36.
    Mooi EA, Ghosh M (2010) Contract specificity and its performance implications. J Mark 74:105–120CrossRefGoogle Scholar
  37. 37.
    Pisano GP (1990) The R&D boundaries of the firm: an empirical analysis. Adm Sci Q 35(1): 153–176CrossRefGoogle Scholar
  38. 38.
    Poppo L, Zenger T (1998) Measurement explanations for make-or-buy decisions in information services. Strateg Manag J 19(9):853–877CrossRefGoogle Scholar
  39. 39.
    Poppo L, Zenger T (2002) Do formal contracts and relational governance function as substitutes or complements? Strateg Manag J 23(8):707–725CrossRefGoogle Scholar
  40. 40.
    Sappington D (1991) Incentives in principal-agent relationships. J Econ Perspect 5(2):45–68CrossRefGoogle Scholar
  41. 41.
    Saussier S (2000) Transaction costs and contractual incompleteness: the case of Électricité de France. J Econ Behav Organ 42:189–206CrossRefGoogle Scholar
  42. 42.
    Srivastava SC, Teo TS (2012) Contract performance in offshore systems development: role of control mechanisms. J Manag Inf Syst 29(1):115–158CrossRefGoogle Scholar
  43. 43.
    Susarla A, Subramanyam R, Karhade P (2010) Contractual provisions to mitigate holdup: evidence from information technology outsourcing. Inf Syst Res 21(1):37–55CrossRefGoogle Scholar
  44. 44.
    Veltri NF, Saunders CS, Kavan CB (2008) Information systems backsourcing: correcting problems and responding to opportunities. Calif Manag Rev 51(1):50–76CrossRefGoogle Scholar
  45. 45.
    Williamson OE (1985) The economic institutions of capitalism. Free Press, New YorkGoogle Scholar
  46. 46.
    Williamson OE (1998) Transaction cost economics: how it works; where it is headed. De Economist 146(1):23–58CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  • Benoit A. Aubert
    • 1
  • Jean Francois Houde
    • 2
  • Suzanne Rivard
    • 3
  • Michel Patry
    • 3
  1. 1.Victoria University of WellingtonWellingtonNew Zealand
  2. 2.Wharton School of BusinessUniversity of PennsylvaniaPhiladelphiaUSA
  3. 3.HEC MontrealMontréalCanada

Personalised recommendations