The Winner’s Curse in IT Outsourcing: Strategies For Avoiding Relational Trauma

IT outsourcing’s adoption by some of the largest international corporations has seen outsourcing become a key component of the Information Management agenda. However, the process of evaluating, selecting, and subsequently contracting out or selling the organization’s IT assets, people and/or activities to a third party supplier raises significant concern in light of the inherent ‘Winner’s Curse’ that may arise when the supplier over-promises on what can be delivered for the contract price. This paper presents a longitudinal outsourcing case study that explicates the often abstruse Winner’s Curse, its effect on post-contract management and the relationship, and how it was alleviated by agreeing to mutually renegotiate the terms of the deal. Building on auction and IT outsourcing theory, the paper provides both a model of IT outsourcing processes, and a Winner’s Curse typology for understanding IT outsourcing ventures. The study finds that a Winner’s Curse in outsourcing may not be evident to either party during negotiations. However, it will result in additional costs for both parties in the form of increased management time and resources; may result in service slippage and high dissatisfaction levels and possibly demand service level renegotiations; may lead to relational loggerheads; and ultimately may result in early contract termination. To avoid experiencing such a relational trauma as a consequence of a Winner’s Curse, this paper identifies six lessons that client and supplier companies should consider before signing IT outsourcing deals. The key message being ‘never mistake a relationship for just an auction’ – outsourcing is a long-term venture.