Governance of IT sourcing relationships : an empirical investigation of the influence of contract mechanisms and behavior

This work is an empirical investigation of IT sourcing contracts and relationships, and on a general level, it is about the relationship between formal contract governance and relational governance of business relationships. It is a study of ‘the nature of contract’, with an emphasis on how elements of the contract influence on co-operation in business relationships (IT sourcing relationships). We employed a cross-sectional design, with data on IT contracts and relationships between a Norwegian industrial buyer and its suppliers of IT products and services. Our results suggest that it is relevant to focus on micro analytic elements of formal contracts, here expressed as contract mechanisms. The contract mechanisms show different effect on contract behavior. Detailed requirement specifications and penalty mechanisms seem to drive competition between the parties. They are extremely powerful discrete mechanisms that could be used in more certain sourcing situations. If, however, the sourcing situation at hand is more complex, then the parties should be very cautious. Measurement and specificity are so powerful that the combination might restrict co-operation. On the other hand, co-operative behavior seems to be promoted by the use of detailed requirement specifications, and by working together in lasting relationships. Finally, we found that environmental and behavioral uncertainty should be treated differently. Environmental uncertainty promotes competition and discrete contract behavior, while behavioral uncertainty seems to promote lasting and co-operative relationships