Information Asymmetry in Information Systems Consulting: Toward a Theory of Relationship Constraints

Opportunism, or self-interest seeking with guile, is often witnessed in human behavior, and it bedevils human interactions and relationships. Organizations expend considerable effort to reduce opportunism. agency theory espouses formal 144 DaWSON, WaTSON, aND BOuDrEau contracts as effective constraints on opportunism; however, a consultant’s use of tacit knowledge subjects clients to information asymmetry that is not amenable to formal contracts. The principal–professional lens was developed to accommodate the presence of tacit knowledge, but it ignores formal contracts and, like agency theory, ignores the existence of principal opportunism. This examination of information systems (IS) consulting notes that when information asymmetry is present, both clients and consultants sometimes behave opportunistically. The level of information asymmetry, the type of knowledge, and the level of contract specificity in an IS consulting engagement determine the mixture of legal and social constraints that are efficacious. Based on these revelations and the inadequacy of other theories, a theoretical model of relationship constraints is developed to explain the interplay between signaling and screening, knowledge type, contract specificity, and the levels of information asymmetry in predicting adopted constraint mechanisms. For researchers, this new model offers a lens to study opportunism from a knowledge-based perspective, whereas for practitioners it offers the possibility of forestalling a decline in markets due to rampant opportunism. Key worDS anD phraSeS: agency theory, information asymmetry, information systems consulting, opportunism, principal–agent relationship, screening, signaling, tacit knowledge. u.S. federal investigators have accused unisys, a major IS [information systems] consulting firm, of failing to provide the cyber security required under its $1.7 billion contract with the Department of homeland Security and then covering it up. The contract called for unisys to install seven intrusion-detection devices, but it allegedly installed only three. Investigators say that unisys tried to hide its performance gaps in an attempt to win future contracts. [27, p. a1] opporTuniSM haS BeDevileD huMan relaTionS for thousands of years, and evolutionary biologists believe that the dominant quality of a successful gene is “ruthless selfishness” [5, p. 200]. Opportunism is self-interest seeking with guile—it differs from simple self-interest seeking [45]. Without the fear of opportunism, many forms of complex contracts vanish and parties can self-enforce an incomplete contract through a general contractual clause that obligates the parties to self-disclose relevant information and behave cooperatively [46]. an opportunistic individual might not behave responsibly, and therefore the notion of a “contract as a promise” is fraught with hazard [45]. If the risk of opportunism is high, firms divert considerable resources to control and monitor for it [42]. Within the IS consulting domain, the problem of opportunism looms large and a host of business press articles allege harmful and unethical behaviors performed by consultants [29, 31]. academic publications question the rigor of consulting services and categorize consultants as “peddlers of management fads and fashions” [17, p. 3] and examine the potential harm that could result from following flawed or impractical consulting advice [15, 17]. These articles typically describe confident consultants INFOrMaTION aSyMMETry IN INFOrMaTION SySTEMS cONSulTING 145 duping gullible clients through the use of highly developed impression management skills [29, 31], and this neatly squares with the notion of opportunism. This is troubling, given the size ($44.5 billion/year) and growth (8 percent/year) of the u.S. public-sector consulting market [10]. according to agency theory, a principal can minimize opportunism by establishing an appropriate contract to reduce agent-favoring information asymmetry [6]. Despite these safeguards, researchers remain concerned about agent opportunism resulting from information asymmetry, particularly in situations when agents are professionals [35]. These “professional agents” use a highly specialized and abstract body of knowledge to solve problems, and this type of expertise can prevent principals from effectively supervising them [8]. Professional agents hold power over the principal by dint of their specialized knowledge base and the “intrinsic ambiguity” of the services that they provide. as a result, the professional agent holds a substantial information asymmetry advantage over a client and this emasculates the principal’s ability to evaluate the professional agent’s efforts [35]. Successful principal–professional relationships depend on the mutual efforts and obligations of the professional agent and principal, and this social interplay enables principals to use socially (rather than contractually) oriented constraints. The principal–professional lens argues that formal contracts, the preferred method to constrain agent opportunism according to agency theory, are ineffective for professional agents [35]. Studies of agency theory or the principal–professional lens have generally taken place within domains that fit squarely within one theory base or the other. Thus, these existing theories are judged apt since the study domain matches the theory. however, IS consulting straddles the two domains, which presents a challenge because agency theory and the principal–professional lens have tenets that make the use of them mutually exclusive. IS consulting offers a relevant domain [35] to address this conflict, and it allows exploration into issues of shared delivery, responsibilities, and consultant and client opportunism resulting from information asymmetry. For example, by concealing information about the availability of its key delivery personnel, a client could avoid revealing staff resentment toward the implementation of a new system, while a consultant could overrepresent the skill of its staff. Either opportunistic act could make system implementation longer and far more costly. although no known studies have examined principal opportunism, it is reasonable to expect that it exists. Because the IS consulting relationship can be theoretically considered from both agency theory and the principal–professional lens, we can examine the explanatory power of these theories in an important arena of information age business practice. also, we can focus on the services side of IS [32] and in so doing illuminate an often-neglected “gray area” in IS [43]. Our research questions are as follows: RQ1: How does opportunism manifest itself in IS consulting engagements? RQ2: How is opportunism constrained? We examine the types of principal and professional agent opportunism that occur in IS strategy and implementation consulting engagements and seek to uncover constraint mechanisms under different conditions of information asymmetry. We study 146 DaWSON, WaTSON, aND BOuDrEau opportunism from both the IS consultant’s and the client’s perspective. Our “soft positivism” orientation allows for examination of existing constructs while uncovering previously unknown ones [24]. This study contributes to knowledge of opportunism within the principal–professional domain and offers theoretical insights into the existence and constraint of opportunism. We propose a theoretical model that is applicable to both the IS consultant as well as the client and suggest areas of further research. The next section examines current literature on IS consulting, information asymmetry, and opportunism. The third section describes our research methodology. The fourth section presents our results, and the fifth section includes a discussion that outlines our research propositions and suggests a new model of relationship constraints. Finally, the paper closes with concluding thoughts. current literature and research Information asymmetry in IS consulting acaDeMicS ofTen reGarD conSulTanTS anD conSulTinG acTiviTieS as a single unit, rather than understanding the salient differences between consultants’ various roles [17]. The role of management consultant has been understood as service provider, information supplier, and business doctor [40], and consultants are often hired to provide fresh insights to struggling chief executive officers [25]. The role has also been described as following a purchase model, doctor–patient relationship, or process consulting [34]. IS consulting is commonly divided into implementation and strategy consulting. IS implementation consulting is “the set of services involved in developing and implementing IT solutions, assets and processes,” and IS strategy consulting is “the set of advisory services that organizations use to assess and improve the effectiveness of functional, operational, and IT strategies” [14, p. 1]. There are several useful ways to frame IS consulting services (e.g., product versus services [39]), but because consulting firms’ activities are increasingly presented as an exemplar of knowledge communities [15], a knowledge-based framework is useful. There are two general types of knowledge—explicit and tacit [3, 12, 13, 18, 20, 33]. Explicit knowledge can be easily codified and is readily accessible to anyone willing to undertake the time and energy to learn it [11, 21]. Explicit knowledge is domain specific; hence, it is focused on knowing usable information in a particular content [2]. Simply knowing the rules of chess, explicit knowledge, does not allow someone to be an effective chess player; that requires practice in order to accumulate tacit knowledge [3]. Tacit knowledge provides wide latitude to frame, interpret, and creatively solve problems [4, 16, 33, 37] and is deeply embedded in an individual’s skill repertoire [3]. Tacit knowledge is focused on know-how—that is, being able to apply explicit knowledge in a competent manner. Over time, as an individual continues to apply tacit knowledge, additional competency is developed through the enrichment of know-how [2, 3, 19]. Domain competency requires understanding the elements of the domain (explicit knowledge) and successfully applying them (tacit knowledge), and so, to be considINFOrMaTION aSyMMETry IN INFOrMaTION SySTEMS cONSulTING 147 ered competent, an IS consultant needs explicit and tacit information technology and systems knowledge (see Table 1) as well as other domain-specific knowledge sets, such as client industry knowledge (e.g., health-care industry). The knowledge required for IS consulting projects can be mapped using this tacit versus explicit typology, along with the types of projects typically associated with different levels of tacit and explicit knowledge. as shown in Table 2, complex implementation projects are more similar to complex strategy projects than they are to simple implementation projects. Both complex implementation and strategy projects require high levels of tacit and explicit knowledge while a simple implementation project may require low levels of both. Implementation and strategy projects can use varying levels of explicit and tacit IS knowledge; hence, a knowledge-based orientation yields insights that are obscured by simply focusing on the end product. Information is rarely fully and equally shared between the participants in a consulting engagement, and participants have different levels of information about other participants and knowledge itself [22]. If asymmetric information exists—that is, if one party has more knowledge (tacit or explicit) than the other party—it creates a market problem and, left unconstrained, drives out high-quality goods/services and honest competitors [1]. asymmetric information is common in IS consulting engagements and indeed should be expected (see Table 3). Signaling and screening are approaches to the problem of information asymmetry [1]. In signaling, the party with the information advantage, often in hopes of inducing a higher price, conveys meaningful information about itself to the other party [36]. For example, IS consulting firms often advertise their cMMI (capability maturity model integration) maturity level as a signal of their ability to deliver high-quality work. By Table 1. Typology for categorizing IS Knowledge Type of knowledge Component Specific elements Explicit Technology Current and emerging technologies Current technology assets Competitors’ use of technology Applications Current and emerging applications Current assets System development Development methodologies Project management practices Management of technology IS planning and business deployment Resource allocation Tacit Experience Personal use of computers IS project management experience Management of IS Cognition Process adaptiveness Vision of the role of IS in the organization Source: Bassellier et al. [3]. 148 DaWSON, WaTSON, aND BOuDrEau Table 2. IS consulting Knowledge Typology Tacit IS knowledge Explicit IS knowledge