Information Technology Outsourcing: Asset Transfer and the Role of Contract

Abstract

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.

Avaliação Dos Principais Critérios De Desempenho De Terceirização De Ti Para a Gestão Contratual Em Empresas Públicas: Uma Revisão Bibliométrica

“…A quarteirização (outsourcing task / delegation) é a transferência ou atribuição de uma tarefa contratual de terceirização, a um prestador de serviços de terceiros, não contemplado diretamente no contrato. Esta prática ocorre pelas mesmas razões da terceirização: reduzir custos, e dedicar-se na atividade principal do negócio, e incentiva um aumento desta prática, porém essa atribuição requer confiança entre as partes (Chang, Gurbaxani, & Ravindran, 2017), e pode gerar um comportamento oportunista aos prestadores de serviço de ITO.…”

Impact of IT Multisourcing on vendor opportunistic behaviour - A research framework

“…Risk-mitigation mechanisms help reduce the likelihood of occurrence of potential negative scenarios by reducing the intensity of risks or preventing the risks altogether Rivard 2003, 2013). In this regard, ITO literature has investigated the effectiveness of a variety of risk-mitigation mechanisms such as contractual safeguards, network embeddedness, relational mechanisms, psychological contract, social capital, monitoring and control in curbing opportunism in a dyadic setting (Chang et al 2017;Lacity et al 2009;Mathew and Chen 2013;Ravindran et al 2015). Though a variety of risk-mitigation mechanisms have been discussed in ITO literature, ITM is essentially different as it moves beyond a dyad into a network of client-vendor organizations.…”

“…In particular, the paper focuses on the risk of vendor opportunistic behaviour, which is classified as 'strategic risk' of outsourcing for the client (Aron et al 2005;Su and Levina 2011). Vendor opportunistic behaviour remains a key concern in ITO practice and is relevant across various IT services such as IT infrastructure (e.g., Chang et al (2017)) and software development (e.g., Gefen et al (2008)). Recent studies highlight various 'vendor risks' for clients including other behavioural risks arising in multisourcing such as vendors blaming each other for failures, scope for collusive activities of vendors and free-riding, which are yet to be fully understood (Bunker et al 2016;de Sá-Soares et al 2014;Wiener and Saunders 2014).…”

The influence of PRINCE2 standard on customer satisfaction in information technology outsourcing: an investigation of a mediated moderation model

“…Information technology outsourcing (ITO) has been an increasingly important phenomenon in recent times. ITO refers to the use of a third-party vendor to provide IT services that are previously provided internally (Patil and Wongsurawat, 2015; Liang et al , 2016; Chang et al , 2017; Wang and Wang, 2019). According to a new report from Statista (2019), revenue in the ITO global market amounts to $395,574 million in 2019, and the global revenue is expected to show an annual growth rate of 1.4%, growing into more than $418,963 million by 2023.…”