Week 07 – IS Outsourcing
Traditionally , outsourcing deals require long term contracts between clients and the vendor and this has been a major area of focus of most of the previous literature. This has also lead to frustration on the part of pretensioners who seek sustainable value from outsourcing. The paper focusses on renegotiation of contracts and investigates the role of decision rights delineated ex ante that enable Pareto improving amendments. Specifically, the authors looks at the effect of flexibility provisions, termination of convenient rights and redoployability rights on part of the vendor to areas outside the contract on likelihood of pareto improving amendments against the default outcome of parties completing the contract without ex post renegotiation.
Two empirical challenges had hampered previous studies namely: lack of good data and lack of rigorous identification strategies. The author was able to overcome this problem by using 10-Q, 10-K, and 8-K filings of firms(SEC) coupled with data from press releases, trade and business reports and press releases from client and vendors.The authors use a probit model for their initial analysis to find the probability of presence of Pareto improving amendment of a contract between client and vendor where as the Ivs include decision rights delineated ex ante, the characteristics of the task contracted upon, contractual provisions, vendor specific characteristics and other client characteristics(including other controls). The results show that flexibility provisions, termination for convenience rights, and contractual rights whereby vendors are granted rights to reuse know-how result in Pareto improving amendments. . The results are robust to potential endogeneity of contractual provisions when parties have the feasible foresight and to the possibility of adverse selection in the sample.
The research contributes to literature by bringing in the angle of renegotiations in contractual decisions highlighting the importance of renegotiation design in enabling adaptation ex-post. It also has implications for practice. Few limitations of the analysis include long term knowledge spillovers(due to redeployability) and noncontractual mechanisms of enforcement which may affect ex post renegotiation.
Paper: Gopal, A. and Koka, B.R., 2012. The asymmetric benefits of relational flexibility: evidence from software development outsourcing. Mis Quarterly, pp.553-576.
The authors focus on a critical manifestation of relational governance – the presence of relational flexibility in the exchange relationship – and argue that the enacted observation of relational flexibility is driven by perceptions of exchange hazards. The authors propose that the benefits accruing from it are asymmetric and depend on how the exchange risks are apportioned by the formal contract. They hypothesize that relational flexibility provides greater benefits to an exchange partner that faces the greater proportion of risk in a project, induced through the contract. In addition, they hypothesize that these benefits manifest on the performance dimensions that are of importance to the risk-exposed partner. The authors test these hypotheses on 105 software projects completed by a software outsourcing vendor for multiple clients. The results show that relational flexibility positively affects profitability in only fixed price contracts, where the vendor faces greater risk, while positively affecting quality only in time and materials contracts, where the client is at greater risk. The analysis provide evidence for the asymmetric benefits from relational governance, thereby arguing for a more contingent and limited view of the value of relational governance, based on risk-exposure, rather than the more expansive view prevalent in the literature contending that relational governance provides benefits for all parties to an exchange.
Gopal, A., & Koka, B. R. (2012). The Asymmetric Benefits of Relational Flexibility: Evidence from software development outsourcing. MIS Quartely, 36(2), 553–576.
Situating the vendor-client relationship in the center of a series of economic and social interactions between organizations. As exchange hazards increase in the relationship, formal contracts are limited in their ability to rein in opportunism due to their incompleteness. Thus, relational governance plays a critical role in the relationship. There are two gaps in current views, one is assumption that these enacted relational mechanisms provide symmetric benefits to all parties. The other gap is, how is value from relational governance captured for different parties in inter-organizational economic activities.
This paper argues that the enacted observation of relational flexibility is driven by perceptions of exchange hazards. This paper proposes that the benefits accruing from relational flexibility are asymmetric and depend on how the exchange risks are apportioned by the formal contract. In addition, it hypothesizes that these benefits manifest on the performance dimensions that are of importance to the risk-exposed partner. These hypotheses are tested on 105 software projects completed by a software outsourcing vendor for multiple clients.
The results show that relational flexibility positively affects profitability in only fixed price contracts, where the vendor faces greater risk, while positively affecting quality only in time and materials contracts, where the client is at greater risk. In contrast, the impact of relational flexibility on quality is higher in T&M contracts where the client bears the greater portion of risk. The findings highlight the need to establish risk exposure first, and then examine the effects of flexibility on performance contingent on risk exposure. They also highlight the implications of relational governance for the performance dimensions of interest. In addition to the theoretical contributions, this paper also makes a methodological contribution by using a triangulating approach to examine the endogenous interactions of relational flexibility and contract type on project outcomes.
Given the sourcing trends are unexamined fully, the paper establishes two research goals:1. assess whether organizations are trending toward one sourcing approach over another;2. examine the extent to which organizational antecedents influence the relative rate at which organizations move toward a specific IS sourcing configuration. Specifically, what’re the answers in the context of healthcare and sourcing decision within EMRS (Electronic Medical Record Systems).
Under the theoretical framework of institutional theory, the authors identify several factors that may impact institutional pressures and therefore influence the adoption decision. 1.strategic orientation, more specifically, whether a hospital is for-profit or not, teaching or not; 2. formal structure, including hospital size and hospital health system size; 3. Case complexity. It mainly uses two data sources: HIMSS database and HospitalCompare database. Thus they can capture the modules that were integrated into the EMRS, the associated suppliers and the contract year, then they can construct the patterns of implementation over year.Then they code sourcing strategies and compare sequence similarities using a matching algorithm by R. Every hospital receives a score based on how many moves it would take to transform its sequence into the prototypical single-sourcing sequence. For the independent variables part, they mainly focus on five variables, which are antecedent, and their interaction with time. The result shows there is not a statistically significant interaction between time and FP hospital; teaching hospitals move toward single-sourcing more quickly; Hospital with higher CMI is more slowly in adopting single sourcing.As their hypotheses put, the size of a hospital has a statistically significant negative interaction with time, but it is not the case for the size of the hospital system. They also give reasonable explanations for the inconsistency.
The paper has several theoretical and managerial contribution. For example, it uses a novel sequence analysis approach to quantifying sourcing configurations. What’s more, it illustrates the how institutional factor influence sourcing strategy factors.
Angst, C.M., Wowak, K.D., Handley, S.M., and Kelley, K. (2017). Antecedents of Information Systems Outsourcing Strategies in U.S. Hospitals: A Longitudinal Study. MIS Quarterly, 41(4), 1129-1152.
Angst, Wowask, Handley, and Kelly (2017) explored information systems sourcing strategies in hospitals to develop an understanding of preferences between single-sourcing and multi-sourcing strategies and their antecedents. Organizations can employ single-sourcing strategies, where all information systems are provided by one supplier, or multi-sourcing strategies, which involve an integration of information systems from a variety of suppliers. Both sourcing strategies come with advantages and disadvantages; for example, single-sourcing allows for a more cohesive system, but one supplier may not be able to provide a sufficient product in all required areas, while multi-sourcing allows for superior products for each domain, but might result in additional IT costs or inter-system communication issues. That being said, results considering nearly all U.S. hospitals over a nine-year period from 2005 to 2013 using sequence analysis across the five IS modules indicated that hospitals were transition to single-sourcing strategies. This finding is counter to larger firm trends favouring multi-source systems. However, the rate at which the hospitals are transitioning to a single-source system depends on various institutional factors.
Leveraging institutional theory, Angst et al. (2017) proposed that organizational antecedents such as strategic orientation (for-profit versus non-profit and teaching versus non-teaching), formal structure (size as the log of the number of hospital beds and membership of larger health systems), and internal dynamics (patient case complexity) will impact hospitals’ rates of transition. Results indicated that there was no significant difference in transition speed between for-profit and non-profit hospitals, teaching hospitals moved towards single-source more quickly than non-teaching, larger hospitals moved towards single-source more quickly than smaller hospitals (which were employing single-source earlier on), hospitals in smaller health systems moved towards single-source more quickly than those in larger health systems, and hospitals with less complex cases move towards single-source more quickly than those with more complex cases in later years.
Anjana Susarla, (2012) Contractual Flexibility, Rent Seeking, and Renegotiation Design: An Empirical Analysis of Information Technology Outsourcing Contracts. Management Science 58(7):1388-1407.
Although a substantial body of research recognizes that contracting for information technology (IT) services is inevitably incomplete. Since traditional complex IT outsourcing deals require long-term contracts, renegotiation design plays a more crucial role compared with that rent-seeking in other industries. However, two empirical challenges hampered the deeper exploration: the lack of appropriate data and the lack of rigorous identification strategy. The author addressed the gap by using a unique sample of 141 IT outsourcing contracts and by measuring the renegotiation decision results via Pareto improving amendments.
To get a deep insight into the renegotiation, the author examined the role of decision rights delineated ex-ante in enabling Pareto improving amendments and in resolving the trade-off between adaptation and rent seeking. To address the endogeneity of the relationship between ex-ante decision rights and Pareto improving amendments, she used a contract date prior to 2000 (coded as a binary variable) as an instrumental variable that affects the presence of flexibility provisions. The results show that flexibility provisions, termination for convenience rights, and contractual rights whereby vendors are granted rights to reuse know-how are associated with Pareto improving amendments. The results are robust to potential endogeneity of contractual provisions when parties have the feasible foresight and to the possibility of adverse selection in the sample.
This work contributes to the literature by empirically showing the role of renegotiation design in fostering flexibility in IT outsourcing and by highlighting the nature of investments in the IT context and the implications for renegotiation design. A complementary approach is to examine the role of relational contracting that enables joint governance and resolution procedures.
Dr. Anjana Susarla at Michigan State University will join us as a guest speaker on February 28. Her bio is available at https://broad.msu.edu/facultystaff/asusarla/. Please read her papers and bring a question to her.
|Gopal and Koka (2012)||Jack, Xi|
|Susarla (2012)||Sid, Joe|
|Angst et al. (2017)||Heather, Letting|
We will discuss Susarla et al. (2011) and Bapna et al. (2016) when time permits.