Success of IT Outsourcing contracts: Effects of the Complexity of the Activity, Relational Governance and Structure of Incentives

The outsourcing of Information Technology (IT) services is a practice generally regulated by contracts. Since contracts are inevitably incomplete, buyer-supplier relationships are usually managed by additional mechanisms of incentives and governance, which results in a variety of success levels. Buyer perceived volatility and ambiguity of the future relationship are argued to be keys in defining the balance of contract design. A model to predict supplier behavior and perceived contract success is proposed by interrelating outsourced activity complexity, relational governance and structure of formal incentives. Results of empirical data show the proposed variables are good predictors of supplier’s behavior and expectation of success of the contracts. This research makes a contribution by clarifying how to better design contracts and how relationships between buyer and supplier can be managed to achieve higher levels of success.