Contractual Provisions to Mitigate Holdup: Evidence from Information Technology Outsourcing.

Author List: Susarla, Anjana; Subramanyam, Ramanath; Karhade, Prasanna;
Information Systems Research, 2010, Volume 21, Issue 1, Page 37-55.
The complexity and scope of outsourced information technology (IT) demands relationship-specific investments from vendors, which, when combined with contract incompleteness, may result in underinvestment and inefficient bargaining, referred to as the holdup problem. Using a unique data set of over 100 IT outsourcing contracts, we examine whether contract extensiveness, i.e., the extent to which firms and vendors can foresee contingencies when designing contracts for outsourced IT services, can alleviate holdup. While extensively detailed contracts are likely to include a greater breadth of activities outsourced to a vendor, task complexity makes it difficult to draft extensive contracts. Furthermore, extensive contracts may still be incomplete with respect to enforcement. We then examine the role of nonprice contractual provisions, contract duration, and extendibility terms, which give firms an option to extend the contract to limit the likelihood of holdup. We also validate the ex post efficiency of contract design choices by examining renewals of contracting agreements.
Keywords: contract duration; extendibility clauses; holdup; incomplete contracts; information technology outsourcing; underinvestment
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List of Topics

#70 0.437 contract contracts incentives incentive outsourcing hazard moral contracting agency contractual asymmetry incomplete set cost client parties examine effort structures double
#47 0.186 outsourcing vendor client sourcing vendors clients relationship firms production mechanisms duration mode outsourced vendor's effort activities in-house managing technology domestic
#271 0.139 technology investments investment information firm firms profitability value performance impact data higher evidence diversification industry payoff return findings decisions greater
#154 0.101 memory support organizations information organizational requirements different complex require development provides resources organization paper transactive depth process outside difficult breadth
#224 0.055 complexity task environments e-business environment factors technology characteristics literature affect influence role important relationship model organizational contingent actual map dimension