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T his paper presents new evidence on the role of embeddedness in predicting contract duration in the context of information technology outsourcing. Contract duration is a strategic decision that aligns interests of clients and vendors, providing the benefits of business continuity to clients and incentives to undertake relationship specific investments for vendors. Considering the salience of this phenomenon, there has been limited empirical scrutiny of how contract duration is awarded. We posit that clients and vendors obtain two benefits from being embedded in an interorganizational network. First, the learning and experience accumulated from being embedded in a client-vendor network could mitigate the challenges in managing longer term contracts. Second, the network serves as a reputation system that can stratify vendors according to their trustworthiness and reliability, which is important in longer term arrangements. In particular, we attempt to make a substantive contribution to the literature by theorizing about embeddedness at four distinct levels: structural embeddedness at the node level, relational embeddedness at the dyad level, contractual embeddedness at the level of a neighborhood of contracts, and finally, positional embeddedness at the level of the entire network. We analyze a data set of 22,039 outsourcing contracts implemented between 1989 and 2008. We find that contract duration is indeed associated with structural and positional embeddedness of participant firms, with the relational embeddedness of the buyer-seller dyad, and with the duration of other contracts to which it is connected through common firms. Given the nature of our data, identification using traditional ordinary least squares based approaches is difficult given the unobserved errors clustered along two nonnested dimensions and the autocorrelation in a firm's decision (here the contract) with those of contracts in its reference group. We use a multiway cluster robust estimation and a network auto-regressive estimation to address these issues. Implications for literature and practice are discussed.

Information Technology Outsourcing (ITO) has become the predominant mode of acquiring information systems services, providing clear evidence that the economics of service delivery favor external service providers over in-house information systems departments. An interesting feature of many large ITO arrangements is that assets necessary for service delivery are transferred to the vendor. The argument in favor of such asset transfers, based in Property Rights Theory, is that they are necessary to incentivize vendors to continue to invest in the transaction-specific assets to improve service. On the other hand, Transaction Cost Economics predicts that transferring such assets increases bilateral dependence and will elevate the risk of post-contractual opportunistic behavior. The contracting challenge is to specify the terms of exchange to achieve the client's objectives for outsourcing while managing the transaction risks. Given the role of asset transfer in ITO engagements, we develop a theoretical framework to derive propositions on contract design in the presence of asset transfer. In particular, we recognize the complementary role of compensation mechanisms, specifically the pricing scheme and the use of performance incentives. We have compiled a unique dataset that provides an opportunity to examine sensitive information on contract structure. We test our propositions by comparing large ITO contracts that include asset transfer to those that do not. We find that asset transfer does significantly affect contract design, manifested in the inclusion of clauses that protect both clients and vendors. Outsourcing objectives are more likely to be met when contracts include compensation mechanisms that complement asset transfer.

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