Social Networks and Contract Enforcement in IT Outsourcing

Most prior research on Information Technology Outsourcing(ITO) has characterized the dominant governance modes as either ‘Formal’ or ‘Relational,’ which rely on stringent assumptions of perfect foresight or about the extent to which one party can punish unilateral deviations by the other. We propose a third alternative in addition to dyadic measures of inter-firm reputation. The reputation of an actor may be associated with how the firm is positioned in a network, which in turn influences how information about a particular actor flows within the network. Such aspects of structural embeddedness suggest a role in predicting characteristics of inter-firm exchange. The network capital offers a measure to mitigate the uncertainty associated the nature of service outsourced and the service provider. The network of trading partners enables a community enforcement of contracting terms by providing safeguards that may not be offered by traditional measures of formal or relational governance. Based on a large dataset of publicly announced ITO arrangements, we examine the role that structural embeddedness can play in predicting contract duration. Our preliminary results are very encouraging. We find evidence suggesting that network position does matter in predicting contract structure over and above the traditional economic variables.