We study the effect of product market competition on the propensity to use corporate venture capital (CVC) as a part of an information technology (IT) firm's innovation strategy. Using novel measures of product market competition based on product descriptions from firm 10-K statements and accounting for potential endogeneity, we investigate how product market competition between 1997 and 2007 relates to the magnitude of CVC spending. We first find that firms in competitive markets make higher research and development (R&D) and CVC investments. In addition, we find that increasing product market competition leads to a shift away from internal R&D spending and into CVC. These movements are significantly stronger for technology leaders, i.e., firms with deep patent stocks, in the IT industry. We also find that CVC appears to be an effective way of exploiting external knowledge for technology leaders in the IT-producing industry, but not for technology slow starters. CVC investments lead to significantly more patent applications for technology leaders but no appreciable difference for slow starters. Our results provide new insights for theories of innovation in competitive, dynamic markets, potentially as part of a portfolio that includes internal R&D as well as open innovation models.
In this paper, the interacting effect of formal contracts and relational governance on vendor profitability and quality in the software outsourcing industry are examined. We focus on a critical manifestation of relational governance--the presence of relational flexibility in the exchange relationship-and argue that the enacted observation of relational flexibility is driven by perceptions of exchange hazards. In a departure from extant literature, however, we propose that the benefits accruing from it are asymmetric and depend on how the exchange risks are apportioned by the formal contract. Formally, we hypothesize that relational flexibility provides greater benefits to an exchange partner that faces the greater proportion of risk in a project, induced through the contract. In addition, we hypothesize that these benefits manifest on the performance dimensions that are of importance to the risk-exposed partner. We test our hypotheses on 105 software projects completed by a software outsourcing vendor for multiple clients. The results show that relational flexibility positively affects profitability in only fixed price contracts, where the vendor faces greater risk, while positively affecting quality only in time and materials contracts, where the client is at greater risk. We thus provide evidence for the asymmetric benefits from relational governance, there by arguing for a more contingent and limited view of the value of relational governance, based on risk-exposure, rather than the more expansive view prevalent in the literature contending that relational governance provides benefits for all parties to an exchange. We conclude with a discussion of the research and managerial implications of our findings.
Past research has studied how the selection and use of control portfolios in software projects is based on environmental and task characteristics. However, little research has examined the consequences of control mode choices on project performance. This paper reports on a study that addresses this issue in the context of outsourced software projects. In addition, we propose that boundary-spanning activities between the vendor and the client enable knowledge sharing across organizational and knowledge domain boundaries. This is expected to lead to facilitation of control through specific incentives and performance norms that are suited to client needs as well as the vendor context. Therefore, we argue that boundary spanning between the vendor and client moderates the relationship between formal controls instituted by the vendor on the development team and project performance. We also hypothesize the effect of collaboration as a clan control on project performance. We examine project performance in terms of software quality and project efficiency. The research model is empirically tested in the Indian software industry setting on a sample of 96 projects. The results suggest that formal and informal control modes have a significant impact on software project outcomes, but need to be finely tuned and directed toward appropriate objectives. In addition, boundary-spanning activities significantly improve the effectiveness of formal controls. Finally, we find that collaborative culture has provided mixed benefits by enhancing quality but reducing efficiency.
An important task for managers in information technology (IT) service settings is the judgment of service performance. The complex and intangible nature of IT services, however, renders this task especially difficult. We use a sample of 85 outsourced software development projects to test for the presence of the "input bias," which is defined as the systematic misuse of nondiagnostic input information in forming managerial judgments of outcomes. The service outcome we examine is process performance. The diagnostic inputs are given by objective performance metrics based on the final cost and duration of completed projects, whereas the nondiagnostic inputs are risk anticipations formed by managers prior to the start of the project. We find strong evidence of the input bias, which leads managers' subjective assessments to diverge considerably from objective outcomes, and that it is moderated by contract type. Our study contributes to better service management by improving our understanding of managers' judgments of service performance and how these judgments are formed.
Prior research has indicated that, on average, offshore vendors have higher profits associated with time and materials (T&M) contracts than fixed price (FP) contracts. This research raises two questions. First, Is the relative importance of various profit drivers different across two contractual regimes? Second, Does it follow that vendors unconditionally prefer T&M contracts for all projects? We address these questions by using data on 93 offshore projects completed by a leading Indian vendor. We use an endogenous switching regression framework and the program evaluation methodology to show that profit equations are distinctly different for the two contractual regimes. Using these two profit equations, we also identify contingencies under which the vendor prefers an FP contract to a T&M contract. We hypothesize that the vendor's ability leverage information asymmetry about capabilities and experiences translates into the vendor preferring FP contract to secure larger information rents. Our results support this hypothesis and suggest that the vendor would prefer the FP contract for larger and longer projects with larger teams. However, vendors would prefer a T&M contract when the risk of employee attrition from the project team is high. In addition, we discuss managerial implications of these results in the paper.