An Empirical Analysis of Contract Structures in IT Outsourcing

Question: Discuss about the Empirical Analysis of Contract Structures in IT Outsourcing. Answer: The reflection paper focuses on Information Technology Outsourcing (ITO) and highlights the methods adopted to structure contracts and determine provisions. An examination of the transaction characteristics including kind of function outsourced, nature of the outsourced relationship, etc helps to understand their impact on the contract choice design in ITO (Handley Benton, 2013). Different contract structure dimensions have been determined based on work of previous theorists. They include monitoring, property rights protection, dispute resolution, and contingency planning. The monitoring function allows activities such as disaster recovery, periodical review, audit, technology enhancement, etc. As per Chen Bharadwaj, the property rights protection allows maintaining confidentiality within the system (Chen Bharadwaj, 2009). Dispute resolution enhances the escalation mechanism. The contingency planning helps to make changes in the contract, etc. The two pricing models that are prevalent in ITO provisions include fixed price and time-and-material price. In the former model, the price of the commodity or service is fixed. A prior contract might already exist due to which limited modifications can be made in the contract (Manning, Larsen Bharati, 2015). The major risk is borne by the vendor due to the preordained feature of the contract. The second pricing model is based on the amount of time and material that is spent to deliver the product or service to the client. It is more flexible in nature and can be modified as per requirements. The fixed price model can be effectively implemented in case of monitoring functions like periodic review and auditing, property rights protection like the right to use, ownership, etc. The time-and-material price can be effectively implemented in case of monitoring functions, property rights protection and dispute resolution function (Oshri Kotlarsky Willcocks, 2015). The various determinants of the contract structure in case of ITO include specific features of the asset, process interdependency and previous interactions. The contract structure is influenced by asset specificity of the client since if the requirements of the client are very unique, the developed software by the vendor cannot be used elsewhere to solve business problems. The process interdependence of the client affects the overall contract structure. According to Chen Bharadwaj, in case of high interdependency, the client could integrate the vendors model into his system so that the process can take place in a smooth way, example restaurants (Chen Bharadwaj, 2009). The prior interaction between the client business and the vendor could have a significant impact on their contractual performance. The previous interaction between both the parties could lead to a less extensive contract. The existing studies on the contract structures in Information Technology Outsourcing help to understand the different scenarios that lead to the outsourcing of certain business functions. Special considerations need to be taken into account while selecting the pricing model so that all the dimensions and provisions of the contract structure can be effectively covered (Chen Bharadwaj, 2009). Similarly, the key factors that have an impact on the contract structure between the vendor and the client must be thoroughly analyzed so that neither party would be at the receiving end. The fixed price allows limited flexibility but has a lower risk associated with while the time-and-material price allows better flexibility but has greater risk since it depends on time and material. References Chen, Y., Bharadwaj, A. (2009). An empirical analysis of contract structures in IT outsourcing. Information Systems Research, 20(4), 484-506. Handley, S. M., Benton, W. C. (2013). The influence of task-and location-specific complexity on the control and coordination costs in global outsourcing relationships.Journal of Operations Management,31(3), 109-128. Liu, Z., Nagurney, A. (2013). Supply chain networks with global outsourcing and quick-response production under demand and cost uncertainty.Annals of Operations Research,208(1), 251-289. Manning, S., Larsen, M. M., Bharati, P. (2015). Global delivery models: The role of talent, speed and time zones in the global outsourcing industry.Journal of International Business Studies,46(7), 850-877. Oshri, I., Kotlarsky, J., Willcocks, L. P. (2015).The Handbook of Global Outsourcing and Offshoring 3rd Edition. Springer.