This study extends the view that formal contracts and relational governance function as complements rather than as substitutes. We investigate how specific characteristics of service level agreements (SLAs) impact relational governance in information technology outsourcing relationships. Eleven contractual elements (categorized into three SLA characteristics: foundation, change, and governance characteristics) are hypothesized to act as complements of three relational governance attributes: relational norms, harmonious conflict resolution, and mutual dependence. Data for the study were collected through a survey of South Korean IT executives. Results of the study support the fundamental proposition of complementarity between formal contracts and relational governance, and indicate that well-structured SLAs have significant positive influence on the various aspects of relational governance in IT outsourcing relationships. However, the study also reveals that change characteristics of SLAs may act as a substitute for relational governance as these characteristics were found to dampen the level of trust and commitment through moderation effects. Overall, the findings support the proposition that well-developed SLAs not only provide a way to measure the service provider's performance, but also enable effective management of outsourcing engagements through the development of partnership-style relationships with high levels of trust and commitment.
Outsourcing is the contracting of various information systems' sub- functions by user firms to outside information systems vendors. A critical factor in the outsourcing process is the bidding and vendor selection mechanism. This paper describes the process of outsourcing and identifies the various stages involved. Subsequently, considering that cost reduction is a driving force of outsourcing for user-firms, this paper proposes a bidding mechanism to reduce expected outsourcing costs in the final bidding and vendor selection process. The paper studies outsourcing contracts of routine and repetitive activities such as maintenance and operation of telecommunication networks. A realistic scenario is studied, wherein multiple vendors bid for such contracts and where one vendor has cost and expertise advantages over other vendors and as a result tends to inflate bids. A mixed integer programming model is formulated for a multiple vendor scenario. In general, the results suggest a prescription that calls for the use of "carrot and stick" policies by the user firm. Subsidies (the carrot) need to be used as incentives for bidders to announce their most competitive bids. In addition, penalties (the stick) have to be levied in order to pressure bidders not to bid high.