When Do Vendors Benefit from Relational Governance? Contracts, Relational Governance and Vendor Profitability in Software Development Outsourcing

We examine the interacting effect of formal contracts and relational governance on vendor profitability in the software outsourcing industry. We argue that the presence of relational governance is driven by perceptions of exchange hazards. In a departure from extant literature, we propose that its benefits depend on the manner in which exchange risks are shared. Specifically, we hypothesize that relational governance provides benefits to an exchange partner only in those contracts in which they are exposed to greater risk. We test these arguments by examining 105 software projects completed by a software vendor. We conclude with a discussion of the implications of our findings