Social Capital and Contract Duration in Buyer-Supplier Networks for Information Technology Outsourcing

Author List: Ravindran, Kiron; Susarla, Anjana; Mani, Deepa; Gurbaxani, Vijay;
Information Systems Research, 2015, Volume 26, Issue 2, Page 379-397.
This paper presents new evidence on the role of embeddedness in predicting contract duration in the context of information technology outsourcing. Contract duration is a strategic decision that aligns interests of clients and vendors, providing the benefits of business continuity to clients and incentives to undertake relationship specific investments for vendors. Considering the salience of this phenomenon, there has been limited empirical scrutiny of how contract duration is awarded. We posit that clients and vendors obtain two benefits from being embedded in an interorganizational network. First, the learning and experience accumulated from being embedded in a client-vendor network could mitigate the challenges in managing longer term contracts. Second, the network serves as a reputation system that can stratify vendors according to their trustworthiness and reliability, which is important in longer term arrangements. In particular, we attempt to make a substantive contribution to the literature by theorizing about embeddedness at four distinct levels: structural embeddedness at the node level, relational embeddedness at the dyad level, contractual embeddedness at the level of a neighborhood of contracts, and finally, positional embeddedness at the level of the entire network. We analyze a data set of 22,039 outsourcing contracts implemented between 1989 and 2008. We find that contract duration is indeed associated with structural and positional embeddedness of participant firms, with the relational embeddedness of the buyer-seller dyad, and with the duration of other contracts to which it is connected through common firms. Given the nature of our data, identification using traditional ordinary least squares based approaches is difficult given the unobserved errors clustered along two nonnested dimensions and the autocorrelation in a firm's decision (here the contract) with those of contracts in its reference group. We use a multiway cluster robust estimation and a network auto-regressive estimation to address these issues. Implications for literature and practice are discussed.
Keywords: social capital ; reputation ; IT outsourcing ; contract design
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List of Topics

#47 0.173 outsourcing vendor client sourcing vendors clients relationship firms production mechanisms duration mode outsourced vendor's effort activities in-house managing technology domestic
#249 0.155 network networks social analysis ties structure p2p exchange externalities individual impact peer-to-peer structural growth centrality participants sharing economic ownership embeddedness
#70 0.140 contract contracts incentives incentive outsourcing hazard moral contracting agency contractual asymmetry incomplete set cost client parties examine effort structures double
#254 0.108 level levels higher patterns activity results structures lower evolution significant analysis degree data discussed implications stable cluster exist relationships identify
#17 0.106 empirical model relationships causal framework theoretical construct results models terms paper relationship based argue proposed literature issues assumptions provide suggest
#238 0.068 shared contribution groups understanding contributions group contribute work make members experience phenomenon largely central key common especially major conceptualizing study
#132 0.056 likelihood multiple test survival promotion reputation increase actions run term likely legitimacy important rates findings long short higher argue prior
#271 0.050 technology investments investment information firm firms profitability value performance impact data higher evidence diversification industry payoff return findings decisions greater