Analyzing IT Outsourcing Contract Outcomes: The Role of Intermediaries

In spite of the prevalence of IT outsourcing, the outcome of IT outsourcing contracts have been less than stellar. However, despite industry reports about dissatisfaction with the performance of IT outsourcing initiatives, there is a lack of research examining the outcome of IT outsourcing contracts. Given the difficulties in selecting appropriate vendors and designing outsourcing contracts, specialist third party intermediaries are often used in IT outsourcing. This research examines how intermediaries influence the outcome of outsourcing contracts. Conventional wisdom associates intermediaries with lowering search costs in the presence of information asymmetry between the client’s needs and the vendor’s capabilities. We contend that this view of intermediaries has to be counter-weighed by considerations of competitive intensity and endogenous entry. Contrary to the received view of the positive role of intermediaries, our analysis using 700 large IT outsourcing contracts from 1989-2009 suggests that the likelihood of IT outsourcing contract failures is higher in the presence of intermediaries, as intermediaries make vendor selection overly competitive. Our conjecture is that in the process of getting the best deal for clients, increase in competitive intensity causes the winning vendor to suffer from winner’s curse or that high-quality vendors are dissuaded from participating in the bidding process. While contract choice misalignment has been studied at the contracting stage, our analysis is the first to link contract misalignment with higher contract failures at the outcome stage.