An Empirical Analysis of Contract Structures in IT Outsourcing

Outsourcing of information technology (IT) services has received much attention in the information systems (IS) literature. However, considerably less attention has been paid to actual contract structures used in IT outsourcing (ITO). Examining contract structures yields important insights into how the contracting parties structure the governance provisions and the factors or transaction risks that influence them. Based on insights from prior literature, from practicing legal experts, and through in-depth content analysis of actual contracts, we develop a comprehensive coding scheme to capture contract provisions across four major dimensions: monitoring, dispute resolution, property rights protection, and contingency provisions. We then develop an empirical data set describing the contract structures across these distinct dimensions, using a sample of 112 ITO contracts from the Securities and Exchange Commission (SEC) database from 1993 to 2003. Drawing on transaction cost, agency, and relational exchange theories, we hypothesize the effects of transaction and relational characteristics on the specific contractual provisions, as well as on overall contract extensiveness. Furthermore, we examine how these associations vary under conditions of fixed price and time and materials pricing structures. The results provide good support for the main hypotheses of the study and yield interesting insights about contractual governance of ITO arrangements.