Complementarity and Evolution of Contractual Provisions: An Empirical Study of IT Services Contracts

Abstract

An increasing volume of business activity appears to be occurring via alliances or other interfirm arrangements in which complex contracts are featured, yet there has been relatively little study of contract design in the strategy or management literatures. The economics literature on contracting has been extensive, but it has been less concerned with learning and evolution—phenomena in which strategy and organization scholars are deeply interested. In this paper, we investigate the relationship between two types of contractual provisions that are important in high-technology contracts, or contracts for which environmental uncertainty or technological complexity are significant, namely, contingency planning and task description. Previous research suggests that contracts can vary significantly in the degree of detail with which such key provisions are written, and that they are each subject to learning. In this paper, we find evidence from a sample of 386 contracts that contingency planning and task description behave as complements in contractual design. We argue that this complementarity reflects patterns of learning to contract. We also find that repeated exchange between two firms leads to greater effort at contingency planning in subsequent contracts, a finding that is also consistent with learning effects, but not with frequently made claims that contracts and trust are substitutes.

Strategic performance effects of misaligned formal contracting: The mediating role of relational contracting

“…Attempting to reduce the overall level of misalignment at the firm level may even lead to increased costs because reducing misalignment can itself be difficult and costly. A number of studies suggest that contracting and aligning contracts with transaction attributes is an activity that must be learned and that firms can build contracting capabilities (e.g., Argyres & Mayer, 2007;Mayer & Argyres, 2004). Consistent with these studies, our post-hoc analysis shows that experience in sales and marketing relates negatively to misalignment.…”

“…Azoulay and Shane (2001) suggest that a lack of knowledge leads contractors, for example, to apply erroneous heuristics or to blindly imitate others or follow the advice of others. The research by Mayer and colleagues (e.g., Argyres, Bercovitz, & Mayer, 2007;Mayer & Argyres, 2004) strongly suggests that contracting choices depend on prior knowledge and experience, which implies that firms and individuals with little knowledge and experience are likely to make poor contracting choices. This assumption means that mistakes -and thus misalignment -are not captured by the first-stage prediction but instead by the absolute value of the first-stage residual (Venkatraman, 1989).…”

“…The core functions of formal contracting are as follows: (1) to facilitate court enforcement, i.e., a more detailed contract specifies a broader area of the parties" relationship (Klein Woolthuis, Hillebrand, & Nooteboom, 2005) and (2) to act as a coordination device (e.g., Wuyts, 2007). Hence, the level of detail is often viewed as one of the most important aspects of formal contracting (Argyres & Mayer, 2007). …”

The Two Facets of Collaboration: Cooperation and Coordination in Strategic Alliances

“…18 Though they do not always frame the debate explicitly in coordination terms, some scholars have argued that partner-specific experiences will influence which coordination issues partners anticipate and which coordination mechanisms they use in those partnerships. Some of the mechanism for coordination that partners develop over time can become routines that are implemented informally (Reuer & Arino, 2007), but some will be formalized in contracts that effectively serve as -repositories of knowledge‖ distilling the lessons of past coordination failures Argyres, Bercovitz, & Mayer, 2007). For example, partners' experiences of misunderstandings resulting from poor informal communication in prior alliances may prompt them to formalize information-exchange provisions in their subsequent alliance contracts (Mayer & Argyres, 2004).…”

Network Capitalism and the Role of Strategy, Contracts and Performance Expectations for Asia-Pacific Innovation Partnerships

“…Reuer & Ariño, 2003;Reuer, Ariño, & Mellewigt, 2006;Sampson, 2004), that is, partners use contracts to define mutual rights and obligations by specifying resource allocations, practices of interaction and problem solving, as well as expected outputs (e.g. Argyres, Bercovitz, & Mayer, 2007;Ariño & Reuer, 2006a;Lerner & Merges, 1998;Luo, 2002). These arrangements provide the basis for operating the partnership.…”